Inflation eased further in May, but remains above normal levels

Inflation eased further in May, but still unclear is whether the economy can slow just enough without causing pain to families and businesses already squeezed by high costs for groceries or rent.

A report out Tuesday from the Bureau of Labor Statistics showed inflation eased for the 11th straight month in May. Prices rose 4 percent in comparison with last year, the smallest 12-month increase since March 2021, and an improvement from the 4.9 percent annual rate noted in April. Prices also rose 0.1 percent in May compared with the previous month.

Those figures show significant progress since the summer, when prices soared to 40-year highs and the consumer price index peaked at 9.1 percent on a year-over-year basis. But inflation is still above normal levels, and a looming question is whether large price increases will become a permanent feature of the economy—or whether more economic pain is necessary for policymakers to root out persistent inflation.

“The bigger question for inflation is: Where is it going? Where does it settle out?” said Peter Boockvar, the chief investment officer at the Bleakley Financial Group. “Are we just going to go back to this 1-to-2 percent inflation trend that we got so used to? Or is there something so structural that after the spike, after the comedown, are we going to settle at 3 [percent]?”

He added: “That plays into: How high do rates stay, and for how long?”

Housing costs continue to be a major driver of overall inflation. Rent rose 0.5 percent in May over the month before, only a minor improvement from a 0.6 percent increase in April. Rental costs are still up 8.7 percent over last year.

Costs for used cars and trucks also increased 4.4 percent in May in comparison with April, as they did the month before. Wholesale costs for used cars have been rising, and those increases are showing up in retail prices.

A narrower measure of prices that strips out more-volatile categories including food and energy rose 0.4 percent in May, as it did in April and March. Fed officials are especially focused on what is known as “core inflation,” since it helps them gauge the underlying sources of inflation that can become the most persistent.

But encouraging signs were sprinkled throughout the report, too. The category for household furnishings fell 0.6 percent over the month, marking that index’s first decline since June 2021 and its largest one-month decline since August 2009. Airfares also decreased 3 percent over the month after a 2.6 percent decline in April.

To get inflation under control, the Federal Reserve has raised its benchmark interest rate at a breakneck pace since March 2022. Those moves have brought the central bank rate, the federal funds rate, to between 5 and 5.25 percent—the highest level in 16 years. The goal is for steep borrowing costs to curb demand for all kinds of lending and investments, including mortgages and auto loans, so that demand for new houses or cars can fall into better balance with supply.

Much of the economy, though, has remained resilient throughout the Fed’s aggressive fight against inflation. Employers added 339,000 jobs in May, marking the 29th straight month of strong job growth. The country does not appear to be barreling toward a recession. And while there are signs that Americans are spending less on restaurants, hotels and airlines, that could help the Fed’s attempts to curb prices in service industries, which have been especially susceptible to labor shortages.

For much of the past 15 months, the Fed has rushed to catch up to inflation, often hiking the federal funds rate in big jumps. And it has always signaled that more work remains to be done. But when central bankers gather for their June policy meeting Tuesday and Wednesday, their agenda will be somewhat different.

The widely held expectation is that policymakers will leave rates unchanged this week to give themselves some time to see how the past year’s increases are filtering through the economy. Rate increases operate with a lag, and many economists argue that the drop in inflation over the past year has been driven largely by improvements in supply chains, gas prices returning to normal and the economic aftershocks of Russia’s invasion of Ukraine gradually fading away. That could mean the full toll of higher rates has yet to be felt.

Still, there are many sources of inflation that haven’t been tamed by the Fed’s moves. The housing market slowed as mortgage rates soared. But rent, which makes up a large share of the consumer price index, continues to be a major driver of overall inflation. Rent isn’t expected to simmer down until the volume of housing available significantly increases or until cooling in the rest of the housing market trickles down to leases. No one knows when that will happen.

Officials have not definitively said they have entirely finished raising rates, and incoming data on inflation, jobs and consumer spending will help them decide whether to make further increases in the coming months. Also significant will be information on banking lending, which has moderated since a recent shock to the financial system made lenders more skittish about issuing credit.

“A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,” Fed governor Philip Jefferson said in a recent speech. “Indeed, skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming.” (Jefferson’s remarks carry added weight since he was nominated to the Fed’s No. 2 role last month.)

In Baltimore, Postman Plus Perry Hall is getting hits from all sides. The pack-and-ship store has seen costs of 250-foot rolls of bubble wrap nearly double. Transportation and shipping costs go up every few months, even since gas prices simmered down from the summer’s peaks. All of the store’s employees start at $15 already, but the hot labor market means they could earn higher pay elsewhere.

Owner Sharon Greenbeck has tried to absorb as much of the cost as possible. But looking at her small business, Greenbeck said it’s nearing time for her to pass higher prices on to her customers. She worries about how they will react. Already, customers raise an eyebrow if they want to send gifts to friends and the shipping ends up costing as much as the gifts. Greenbeck said she has even seen inflation encroach on the “little things.” For instance, the rubber ducks she would have in stock for children have doubled in price.

“I sell less because people say, ‘Oh, I’m not spending $2 on a duck,'” Greenbeck said. “So then my merchandise sits. It’s an ugly cycle.”