Inflation Outlook Finally Gets Some Positive News
47 months.
That’s the number of consecutive months that consumer prices have risen over the past four years. On Wednesday, that streak officially ended when the Department of Labor’s Consumer Price Index (CPI) was released. The much-anticipated report showed that consumer prices in May remained unchanged from April. Granted, prices didn’t decline. But after 47 consecutive months of rising prices, it’s understandable to try and find the silver lining.
The national inflation rate was reported at 3.3%, down slightly from April’s rate of 3.4%. This means that consumer prices, on average, are still 3.3% higher than they were 12 months ago. “Core” inflation, which strips out the more volatile and seasonal food and energy prices, was reported at 3.4%. The core inflation rate for April was 3.6%.
Across the four regions of the country, the Midwest reported the lowest inflation rate at 2.7%. This was followed by the South (3.2%), the West (3.3%) and finally, the Northeast (3.9%).
One of the hallmarks of this current inflationary cycle is that one of the areas hardest hit by rising prices has been basic necessities – energy, shelter, clothing and food. May’s better-than-expected CPI report indicates the pace of rising prices on basic necessities has been gradually easing. Last month, ever-volatile energy prices fell by 2%, led by a 3.6% decline in gasoline prices. This was a welcome respite as energy prices rose by 1.1% in both March and April. Energy prices are still 3.7% higher than they were 12 months ago. Food prices also rose a tepid 0.1% in May and are up 2.1% over the past year. Likewise, clothing prices actually declined by 0.3% last month and have risen only 0.8% over the past year.
On the negative side, the cost of shelter remains stubbornly high. In May, shelter costs rose another 0.4% and have risen 5.4% over the past year.
To try and get inflation under control, the Federal Reserve raised the benchmark fed funds rate to a 40-year high. The fed funds rate often serves as a basis for many types of consumer debt, such as credit cards, auto loans, bank loans and home mortgages. As the fed funds rate is raised, so typically do interest rates on consumer debt. The Fed’s goal is that by making it more costly to borrow money, consumer spending will start to ease. As consumer spending slows, this should inherently apply downward pressure on rising prices.
With interest rates on many types of debt also near 40-year highs, lowering interest rates would provide much-welcomed financial relief to both consumers and businesses. In January, the Fed had publicly forecast three 0.25% reductions to the fed funds rate. Wall Street was even more optimistic, projecting the Fed would implement as many as seven 0.25% reductions this year.
On Wednesday, many were hoping the latest inflation report would serve as the spark to allow the Fed to start lowering interest rates. After all, it marked the end of 47 consecutive months of rising consumer prices. The inflation rate also fell from 3.4% to 3.3%.
But on Wednesday, the Fed acknowledged that despite the good news, inflation still remains excessively high. Even at its current level of 3.3%, inflation has a long way to fall before reaching its target rate of just 2%. Moreover, the rate of inflation now (3.3%) is actually higher than it was in January (3.1%). On Wednesday, the Fed reduced its number of projected 0.25% reductions to the fed funds rate this year from three down to just one. Most likely that single rate cut would happen in December.
Without question, progress has been made on the inflationary landscape. But that progress has been very slow. And despite May’s CPI report, the Fed insists it still needs more evidence that inflation has finally been tamed.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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