May flowers bloom

June 12, 2024

The consumer price index (CPI) was unchanged in May, with a drop in energy prices and a sideways movement in grocery store prices offsetting increases elsewhere. Gas prices alone dropped 3.6% during the month, the first retreat since January and welcome news to consumers who react to changes in gas prices more than any other component of inflation. That alone shaved more than a tenth of one percent from the overall figure. A drop in the price of dairy products offset an increase in meats. That translates to a 3.3% increase from a year ago in May versus 3.4% last month. That is the best reading we have seen on overall inflation since February 2024 when the overall index was at 3.2%.

The core CPI, which excludes the volatile energy and food sectors, also improved during the month, rising only 0.2% in May after a 0.3% advance in April. That translates to a 3.4% increase from a year ago, which is the lowest annual reading since April 2021.

The shelter component continued to rise 0.4% for the fourth consecutive month. That is a moderation from earlier in the cycle but still elevated relative to the pre-pandemic pace. A rollover in shelter costs is expected to help bring inflation closer to the Federal Reserve’s 2% target by year-end. Hotel room rates fell during the month, despite record travel during the Memorial Day Holiday.

The super core services, which strips out shelter costs, edged down slightly before rounding. That is the first decline in the super core since September 2021. The bulk of that drop was in transportation services. That includes everything from airfares to vehicles rentals, insurance and repairs. Airfares, motor vehicle insurance and some repairs fell in price. Motor vehicle insurance is up 20.3% from a year ago, which represents a slight moderation from nearly 23% in April. The April figure represented the largest increase in annual vehicle insurance since 1976. This is one of many places where the level of prices matters.

Outside of transportation services, recreational services fell with a drop in streaming costs. This is an area where consumers have begun to push back on price hikes and scaled back spending on in-home entertainment. Medical services costs moderated from the pace we saw in March and April. The sticking point was health insurance, which accelerated 0.5% during the month. The methodology on health insurance shifted last September, which made it a drag instead of a push on the overall CPI. That is beginning to play out and should become a driver of overall inflation once we move into the latter part of the year.

The biggest outlier in the core services remained the costs of childcare and schooling. Daycare and preschool surged 0.6%, along with private school tuition.

The core services CPI, which has garnered the most attention by the Fed, rose 3.3% from a year ago in May, down from 3.4% in April. The three-month annualized pace improved to 4.9% from 6.8% last month. The six-month annualized pace moved up to 4.6% from 3.9% last month. That is encouraging for the Fed, but one data point does not a trend make; the underlying inflation data is still above levels consistent with returning to the Fed’s 2% target. Look for participants at the Federal Open Market Committee meeting to be fairly split between one and two rate cuts for the remainder of the year. Today’s data helps to sideline those who were contemplating the need for an additional hike in 2024