Weekly Economic Trends and Indicators

The Bureau of Labor Statistics reported last week that the consumer price index (CPI) rose 0.1% in May (seasonally adjusted). This is down from a 0.4% increase in April. The seasonally unadjusted increase over the last 12 months was 4.0%. While core inflation (excluding food and energy) continues to remain stubbornly high at 5.3% in the last 12 months, the news was generally hailed as positive. In view of this and other data on the economy, the Federal Reserve held the fed funds rate target constant for the first time since last March.

The Details:

The main contributor to the decline in inflation last month was energy prices, which fell by 3.6% for the month and are down 11.7% over the past 12 months. Five out of the last seven months have seen declines in energy prices. This decline is very visible to the consumer and has likely played a major role in reducing inflation expectations. The New York Fed reported this week that household inflation expectations for the next year declined from 4.4% to 4.1%, the lowest seen since May 2021. Housing prices and used car prices continue to rise more quickly, however, and will likely remain an issue for the foreseeable future.

The Context:

In last week’s installment, I stated that the Fed will find it difficult to pause the rate hikes until inflation responds. This most recent news was at least enough to allow for what analysts are calling a “hawkish pause.” In other words, the battle against inflation is not yet won, and the Fed anticipates more rate increases this year (probably at the next meeting and at least one more). Core inflation remains a problem, and the labor market continues to be very tight. These developments may indicate a shift toward a higher fed funds rate at the end of this tightening cycle, but getting there more gradually, as opposed to continuing the faster pace of rate hikes that could provoke a recession. Thus, a soft landing remains achievable, but it would come at the cost of elevated levels of inflation persisting for a longer period of time.

Next week: Financial market outlook

Chart sources:

• U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCSL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPIAUCSL, June 20, 2023.
• U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPILFESL, June 20, 2023.