Weekly Economic Trends and Indicators

The Headlines:

The Bureau of Labor Statistics (BLS) recently reported that the consumer price index (CPI) increased 0.5% in May. In April, the CPI increased 0.6%. For the 12 months ending in May, the CPI increased by 4.2%. In a separate report, the BLS reported that the producer price index (PPI) for final demand increased 1.1% in May, unchanged from the revised number for April. The energy component of the PPI increased 10.7% in May, higher than the revised numbers for both March and April (10.4% and 7.5%, respectively). The PPI for final demand excluding food, energy, and trade services increased 0.8%, the highest since March 2022.

The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index increased 0.4% in May, pushing the 12-month inflation rate above 4% for the first time since May 2023.

The Details:

The core CPI (excluding food and energy) increased at a 0.2% seasonally adjusted rate in May, down from 0.4% in April and more in line with the last several months. The 12-month core CPI inflation rate was 2.9%. Some items in core CPI experiencing higher 12-month inflation rates include apparel (4.8%), tobacco and smoking products (7.8%), shelter (3.4%), hospital services (5.7%), motor vehicle maintenance and repair (6.1%), and airline fares (26.7%).

Gas prices increased 7.0% in May. The rate of increase was down from 21.2% in March, but up from 5.4% in April.

Last month, we noted that wholesale prices showed evidence of spillovers from energy price increases. Revisions to April’s estimate for the PPI for final demand services suggest that there was less spillover than originally thought. The monthly increase was revised down from 1.2% to 0.7%--which is still quite high. In May, PPI for final demand services was back down to 0.3%, in line with previous trends.

The Context:

As noted last month, Midwest regional inflation rates are still running ahead of the national rates. Midwest CPI inflation hit 5.0% for the 12 months ending in May. Shelter price increases are still the most important reason; however, other categories such as food, gasoline, electricity, and consumer nondurables have seen faster price increases than the rest of the country in recent months.

Inflation is shaping up to be a critical data point to watch going into the second half of the year. As we pointed out last week, there is a tension between policymakers such as the new Fed chair Kevin Warsh who may be predisposed to lowering interest rates and the inflation hawks both inside and outside the Fed who are calling for rate hikes.

While the May inflation data was a little higher than expected, recent developments regarding the conflict with Iran suggest that we will see some improvement in June. Oil prices briefly dipped below $70/barrel on Wednesday, and gasoline prices have started to drift lower.

The Federal Reserve Bank of Cleveland publishes a “nowcast” for both CPI and PCE inflation. As of June 25, they are forecasting a flat CPI and only a modest 0.1% increase in the PCE price index for June. This estimate takes into account the most recent daily data and news, particularly regarding energy prices—which are subject to the most day-to-day volatility. That should be enough to bring the 12-month inflation rates for both the CPI and PCE under the psychologically important 4% level. Whether that will be enough to satisfy the inflation hawks remains to be seen.

Next week: Quad Cities employment update