The latest Consumer Price Index (CPI) report reveals that inflation in the United States is slowing down. The data released by the Bureau of Labor Statistics on Tuesday shows that consumer prices in May rose at the slowest rate since March 2021. The CPI, which measures the changes in prices for a basket of goods and services, increased by 4% over the year ending in May. This represents a significant decrease from April's 4.9% and is slightly below the economists' expectation of a 4.1% gain.
On a monthly basis, prices only increased by 0.1% from April to May, whereas economists had predicted a 0.2% increase. This marks the 11th consecutive month of a slowdown in inflation, bringing relief from the persistently high inflation experienced in the past two years. In comparison to the same time last year, when the CPI was at 8.6%, the current rate of 4% is much lower.
The decline in energy prices and a slowdown in the rise of food prices contributed to the decrease in the overall inflation rate. Additionally, the phenomenon known as base effects played a role. A year ago, inflation was rapidly increasing and reached a peak of 9.1% in June. While the current rate of 4% is significantly lower than 9.1%, it still exceeds the desired inflation target of 2% set by the Federal Reserve.
Nancy Vanden Houten, the lead US economist at Oxford Economics, sees this as a positive development, stating, "It's another step in the right direction." However, Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, acknowledges that inflation is still too high but notes that the trend is moving in the right direction. The Federal Reserve, which has been raising interest rates since March 2022, aims to achieve the target inflation rate of 2% as measured by the core Personal Consumption Expenditures index.
The CPI report arrives as the Federal Reserve officials gather for their monetary policymaking meeting. This report is one of the final major pieces of economic data they will consider before announcing their rate decision on Wednesday. After increasing the benchmark interest rate 10 times in a row, the Federal Reserve is expected to pause its hiking campaign this time. They want to evaluate the cumulative effects of monetary tightening and the impact of stricter lending standards in the banking industry.
Currently, market indicators suggest a 95.3% probability that the Federal Reserve will pause on Wednesday, according to CME FedWatch.