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  • Writer's pictureRealFacts Editorial Team

CPI and Inflation Report: Fed's Cautious Stance Amid Moderating Inflation and Strong Labor Market

Graph over a picture of a store

Federal Reserve Actions and U.S. Inflation 

In May, U.S. consumer prices were unexpectedly unchanged from the previous month, primarily due to cheaper gasoline. This pause followed a 0.3% increase in April and represents a trend of moderating inflation since February and March. Despite this slowdown, inflation remains above the Federal Reserve's (Fed) 2% target. The Consumer Price Index (CPI) for the year ending in May ends at 3.3%, slightly down from April's 3.4%. Inflation looks stagnant however Jerome Powell beginning the press conference this week said “We are strongly committed to returning Inflation to our 2% goal in support of a strong economy that benefits everyone.” 

Graph of US CPI

Retailers, such as Target, have been reducing prices to attract inflation-weary consumers, which may contribute to continued moderation in price pressures. However, job growth has accelerated, and wages have increased, with the unemployment rate rising to 4%. This labor market strength complicates the Fed's decision-making process.

The Fed has raised interest rates significantly, since March 2022, to the current range of 5.25%-5.50%. Despite market expectations for rate cuts to begin in September, some economists suggest the first cut may not occur until December or later, which is a disappointment since back in December we were expecting a cut around this time in June or July, however the reason we aren't seeing the cut is do to the economy still runny hot. Core CPI, excluding volatile food and energy prices, increased by 0.2% in May, the smallest monthly gain since October last year. 

Consumer Price Trends Analysis 

May's inflation data provided a complex picture. While gas prices fell by 3.6% from April and grocery prices remained flat, housing costs continued to rise, with shelter inflation increasing by 0.4% for the fourth consecutive month. This persistent rise in housing costs is a significant concern for the Fed, as shelter expenses have a substantial weight in the CPI calculation. 

The cost of transportation services fell for the first time since 2021, with gas prices dropping and new vehicle prices dropping slightly, as well motor vehicle insurance prices slightly decreased. Despite these declines, transportation and insurance costs remain high compared to the previous year. Food prices showed mixed trends, with some staple items like rice, white bread, and milk seeing price drops, while beef and tomatoes experienced faster price increases.

graph of 12 month percentage change

graphic of decreasing consumer prices

High living costs continue to burden consumers, despite the recent moderation in inflation. Housing, insurance, and food costs remain significantly expenses for many households. Financial experts advise consumers to take advantage of higher interest rates on savings accounts, CDs, and money market funds, as many bank accounts still offer very low interest rates. 

Global Market Reactions and Political Implications 

Asian markets exhibited mixed reactions to regional inflation data and global economic reports. Japan's producer prices surged by 2.4% year-over-year in May, leading to a decline in the Nikkei index. Meanwhile, China's consumer inflation remained steady, and producer price deflation eased, hinting at potential economic stimulus measures. 

Inflation and economic performance are critical issues for voters, particularly as the U.S. approaches the 2024 presidential election. A recent ABC News/Ipsos survey found that 85% of U.S. adults consider inflation an important issue, with many expressing more trust in former President Donald Trump over President Joe Biden on economic matters. 

The economic landscape remains uncertain, with mixed signals from inflation data and a strong labor market. The Federal Reserve's cautious approach reflects the challenges of balancing inflation and control with economic growth. Markets continue to adapt, driven by strong corporate performance in key sectors. Consumers face ongoing cost pressures but can find opportunities in high-yield savings options. The global economic context and upcoming policy decisions will be critical in shaping future trends.


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