May inflation climbs to 4.2%, Fed likely stays on hold

Prices of goods and services continued to climb in May, according to data released Wednesday by the U.S. Bureau of Labor Statistics (BLS). 

In May, the Consumer Price Index for all items rose 0.5% from a month, down from a 0.6% monthly increase in April. However, annually, the all items index rose 4.2% in May, up from the 3.8% annual increase recorded in April. This is the fastest annual pace of inflation since April 2023. 

According to the BLS, the energy index, which rose 3.9% month-over-month and 23.5% year-over-year,  accounted for over 60% of the monthly all-items index increase. 

The index for all items less food and energy rose 0.2% month-over-month in May, thanks to increases in the indexes for communication (+1.3%), airline fares (+2.7%), medical care (+0.3%), personal care (+1.0%) and recreation (+0.3%). Year-over-year, the all items less food and energy index rose 2.9%, up from a 2.8% increase in April.

“May’s inflation report was a tale of two CPIs: higher energy costs pushed headline inflation to its fastest pace in two years, but underlying inflation remained relatively contained,” Odeta Kushi, First American’s deputy chief economist, said in a statement. 

The index for shelter rose 0.3% month-over-month and 3.4% compared to a year prior, while the food index jumped 0.2% on a monthly basis and 3.2% on a yearly basis. 

Fed unlikely to change its near-term policy outlook

Economists said that due to the softer increase and relative stability of core inflation, the Federal Reserve is unlikely to change its near-term policy outlook. 

“Inflation remains higher than policymakers would like and a resilient labor market gives the Fed little urgency to lower interest rates,” Khushi said. “At the same time, the relatively tame core reading should provide some reassurance that underlying inflation has not reaccelerated. The result is likely to reinforce the Fed’s current wait-and-see approach and keep rate cuts on hold for now, as officials look for greater confidence that inflation is moving sustainably back toward target before considering any policy easing. The softer-than-expected monthly core reading also reduces the likelihood that policymakers will need to consider rate hikes.”

While mortgage rate relief may not be coming anytime soon, Khushi believes increasing inventory levels and improving consumer confidence in the labor market and overall economy will still help propel the housing market forward. 

“The encouraging news for housing is that demand appears to be waiting on the sidelines, rather than disappearing altogether,” she said. “Existing home sales posted their strongest monthly gain of the year in May and reached their highest level since December, despite mortgage rates moving higher during the month.”