US Consumer Price Index rises 0.16% in May, lowest since August 2021

Downside surprise in US CPI prompts a dovish Federal Reserve

by Faruk Imamovic
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US Consumer Price Index rises 0.16% in May, lowest since August 2021
© Getty Images/Joe Raedle

In May, the US Consumer Price Index (CPI) surprised on the downside, fueling speculation about the Federal Reserve's monetary policy stance. The Core CPI, which excludes volatile food and energy prices, rose by just 0.16% month-over-month (MoM).

This was softer than expected and marked the lowest reading since August 2021. Much of the improvement was attributed to the core services excluding rent and owner’s equivalent rent (OER) component, which fell by 0.04% MoM after previously rising by 0.42%.

While core goods provided less relief than in April, the details painted a more optimistic picture, with the relief broadening beyond used cars and trucks. Breadth measures indicated significant improvement in favor of disinflation, with a more complete picture expected to emerge with the Producer Price Index (PPI) release.

The current data suggests a core Personal Consumption Expenditures (PCE) reading of around 0.18% MoM, which would be the most subdued of the year.

Key components of CPI in May

  • Core Goods and Services: In May, core goods declined by 0.04% MoM.

    Although this provided less relief than in April, the underlying details were more favorable for disinflation, as the decline occurred despite rising prices for used cars and trucks. When excluding used cars and trucks, core goods fell by 0.12% MoM, the lowest result of the year.

    This points towards a potential -0.15% MoM reading for core PCE goods, marking a significant improvement from April’s 0.16% MoM.

  • Core Services Excluding Rent/OER: This category declined by 0.04% MoM, the lowest since September 2021.

    While this decline may not fully translate into the core PCE reading, it is still a positive sign, suggesting some "catching down" as the CPI measure had been much firmer than the core PCE equivalent earlier in the year. Notable relief came from airline fares, which dropped by 3.6% MoM, and recreation services, which fell by 0.2% MoM.

    Additionally, upward pressure from motor vehicle insurance decreased.

  • Rent of Primary Residence and OER: Both of these components saw a rebound in May. Rent of primary residence increased by 0.39% MoM, up from 0.35% in April, while OER rose slightly to 0.43% MoM from 0.42% previously.

    Looking ahead, a gradual slowing in the pace of both measures is expected, though the magnitude and timing of further relief remain uncertain.

  • Breadth Measures: The median CPI slid to 0.25% MoM, the lowest since July. An ex-idiosyncratic measure, which excludes unique price changes, fell to 0.19% MoM, the lowest since February 2021.

Implications for Federal Reserve Policy

The improvement in inflation data, coupled with mixed signals from the labor market, has led to a shift in expectations for the Federal Open Market Committee (FOMC) easing.

The first 25 basis points (bps) cut is now anticipated in the fourth quarter of 2024, specifically in December, brought forward from the first quarter of 2025 previously.

US Consumer Price Index rises 0.16% in May, lowest since August 2021© Getty Images/Michael M.

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Consumer spending shows resilience despite subdued retail sales

Despite subdued retail sales in May, real spending growth appears solid. Both headline and core retail sales (excluding food and energy) rose by 0.1% MoM.

Although weaker than anticipated, these figures still point towards strong real goods consumption growth, as retail sales are reported on a nominal basis and goods prices broadly declined in May. The Federal Reserve Bank (FRB) of Atlanta's GDPNow estimate for the second quarter of 2024 remained steady at 3.1%, with a slight downgrade in consumer spending offset by upgrades to residential investment and business fixed investment.

Consumer confidence has been wavering, and credit growth has decelerated, but steady gains are still anticipated due to factors such as job gains, real wage growth, and wealth effects, particularly from rising house prices.

Housing categories weigh on results

At the store category level, results were mixed. Strength was observed in sporting goods, hobby, musical instrument, and book stores, which rose by 2.8% MoM, clothing and clothing accessories, up by 0.9%, and non-store retailers, which increased by 0.8%.

However, housing-related areas were a drag, with furniture and home furnishing stores declining by 1.1% MoM and building materials and garden equipment stores falling by 0.8% MoM. On a year-over-year (YoY) basis, there are encouraging signs that discretionary store sales growth has bottomed out.

After a subdued first quarter, auto sales volumes are tracking towards a 2.5% quarter-over-quarter increase in the second quarter.

Divergence in real wages and income expectations

Real wage growth was robust in May, driven by low inflation and firm average hourly earnings.

This, coupled with continued job growth, suggests strong real consumer spending growth for the month. However, despite recent strong wage gains, consumer expectations for real income growth over the next one to two years have fallen sharply.

Wealth effects may provide a further boost to consumption in the coming months. Household net worth as a share of disposable income has started to rebound after declining during 2022. This rebound may have an even more substantial impact on the median household, given the gains in house prices over the past year.

According to Federal Reserve data, the median homeowner household in 2022 had a total net worth of $397,000 and a primary residence value of $323,000.

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