US Inflation Eases in May, but Underlying Price Pressures Remain
Consumer price increases in the United States are expect to have slowed sharply in May. Indicating a continued easing of US inflation over the past year. Economists forecast a 4.2% year-over-year increase in prices, compared to the 4.9% rise in April.
Month-on-month, prices are project to have increased by only 0.1%, lower than the previous month’s 0.4% increase.
However, the focus on core prices, which exclude food and energy costs, reveals a different picture. Core inflation is expect to have risen by an uncomfortably high 0.4% in May.
With a year-over-year forecast of 5.3%, signaling persistent inflation pressures.
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Resilient Economy Fuels Stubborn US Inflation
The persistence of underlying inflation poses a challenge for the Federal Reserve as the economy defies recession forecasts.
Robust hiring, climbing wages, and increased consumer spending contribute to chronically high US inflation.
Some economists suggest that businesses are maintaining higher prices to protect profit margins. While consumers would need to significantly reduce spending for businesses to adjust pricing.
The Fed’s 10 consecutive rate hikes since March 2022 have aimed to slow borrowing, spending, and inflation without causing a severe economic downturn.
As Fed officials convene for a two-day meeting. They are expect to leave interest rates unchange but may indicate a possible rate increase as early as July.
The Fed’s aggressive rate hikes over the past 15 months have already had an impact on borrowing costs for mortgages, auto loans, credit cards, and business loans.
Officials want to assess the effects of these hikes on inflation and the overall economy before deciding on further rate adjustments.
The goal is to curb inflation while avoiding a deep recession, which presents a challenging balancing act.
Fed’s Assessment and Future Rate Hikes
US inflation is expected to decrease further in the June figures, with estimates suggesting a year-over-year decline to around 3.2%.
However, this decline is partially due to the higher price levels experienced in the same period last year.
Despite this, core prices are projected to remain elevated in May, primarily driven by increases in used car prices and rental costs.
Used car prices have seen significant spikes in recent months, but wholesale prices have already started to decline.
Rental costs are also expected to fall due to rising apartment vacancy rates. These factors are expected to contribute to a narrowing of inflation in the coming months.
While overall inflation has shown signs of easing in May, core US inflation remains persistently high. The Federal Reserve faces the challenge of curbing inflation without dampening economic growth, and upcoming data will play a crucial role in guiding future monetary policy decisions.
Factors such as used car prices and rental costs will heavily influence core inflation in the near term, with expectations of a gradual decline in the coming months.