Inflation Stays Tied to Energy Prices
So, here’s the not-so-great news about inflation: the Consumer Price Index (CPI) went up 4.2% in May compared to last year. It’s, well, the highest CPI we’ve seen in the last three years, which isn’t exactly encouraging.
On a brighter note, though, inflation seems to be easing in May. Inflationary pressures aren’t spreading from the energy market to other sectors, which is a relief.
Let’s unpack what’s really affecting these numbers. Energy prices surged by 23.5% over the past year, contributing about 1.76 percentage points to that total of 4.2%. That’s roughly 42% of the annual increase. A significant factor? One particular geopolitical supply disruption. Gasoline alone has risen by 40.5% over the year. When energy is disregarded, the overall index only goes up by 2.4%, which is a number the Fed can manage.
Looking at the month-by-month info, there’s more positive news. The all-item index rose a seasonal-adjusted 0.5% in May, which is a drop from April’s 0.6% increase. Core inflation (everything except food and energy) went up just 0.2%, mirroring the weakest monthly figure seen in a while, now annualizing to about 2.4%. To put it simply, inflation is slowing, rather than speeding up.
On the product side, core goods saw a seasonal drop of 0.1% in May. Sales of durable goods are pretty much stagnant compared to last year. New car prices increased a mere 0.2% over the year, whereas used cars saw a decline of 2.0%. Home furniture recorded its lowest monthly figure since August 2009, while electronics and high-tech items dropped by more than 12%. There’s no real indication that rising energy prices are affecting commodity prices.
Declines in Insurance and Drug Prices
Outside the energy sector, there’s a significant wave of deflation rippling through the economy. Auto insurance, which makes up about 2.7% of the index basket, fell 1.7% in May—this is the biggest single-month drop since October 2020, effectively reversing years of steady increases that have fueled service inflation. Prescription drugs have decreased by 2.0% over the year, and over-the-counter medicine prices dropped by 2.5%. Health insurance has also dipped by 6.4%. Surprisingly, 29 categories with considerable weight in the basket have seen year-over-year declines.
Here’s a thought for those in Washington, DC: Republicans should promote these price drops widely, especially as the midterms approach. Falling drug and insurance prices could resonate well with voters. The same goes for cars—prices are down, along with car insurance, which is a win for families.
The remaining stubborn services are primarily linked to evacuation centers, making up 35 percent of the total CPI basket. Shelter remains sluggish, as market rents have dropped since their peak a few years ago. Owner-equivalent rents were at 0.3% in May, down from 0.5% earlier this year. Other significant service increases include airfare, which rose 26.7% over the year, largely due to jet fuel costs.
The supercore index (everything but food, shelter, and energy) only increased by 0.1% in May, translating to an annual rate of 1.2%.
The Cleveland Fed’s strategies aimed at combating inflation, especially regarding extreme price fluctuations like those from the oil crisis, support this situation. The median CPI at the Cleveland Fed was 2.85%. The annual increase in May was 2.91%, and when adjusted for the usual differences between the CPI and PCE measures, they’re both nearing the Fed’s 2% target and have slowed on a monthly basis since April’s energy spike.
To be clear, the oil shock is not insignificant. Yet, the data suggests an economy with subdued underlying inflation and widespread drops in commodity prices.
