US Consumer Price Index Rises 3.3% In May 2024

The U.S. Bureau of Labor Statistics reported today (12/06/2024) that the Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in May on a seasonally adjusted basis, following a 0.3 percent increase in April. Over the past 12 months, the all items index rose 3.3 percent before seasonal adjustment, reflecting ongoing inflationary pressures in the U.S. economy.

Key Highlights:

• Shelter Costs: The shelter index increased by 0.4 percent for the fourth consecutive month, more than offsetting a decline in gasoline prices.
• Food Prices: The overall food index rose by 0.1 percent, with the food away from home index up 0.4 percent, while the food at home index remained unchanged.
• Energy Prices: The energy index fell by 2.0 percent, led by a 3.6 percent decrease in the gasoline index.
• Core Inflation: Excluding food and energy, the index rose by 0.2 percent, with notable increases in shelter, medical care, used cars and trucks, and education. However, airline fares, new vehicles, communication, recreation, and apparel saw declines.

Detailed Analysis:

Food:

The food index experienced a modest rise of 0.1 percent in May. Within this category, the food at home index remained stable, while dairy products fell by 0.5 percent, led by a 1.3 percent drop in milk prices. The food away from home index increased by 0.4 percent, indicating higher costs for dining out.

Energy:

The energy index’s 2.0 percent decline was driven by a significant 3.6 percent drop in gasoline prices. Electricity prices held steady, while natural gas and fuel oil saw minor decreases.

All Items Less Food and Energy:

The shelter index’s 0.4 percent rise was a major factor in the overall increase in core inflation. Medical care costs rose by 0.5 percent, with prescription drugs and hospital services seeing notable price hikes. Used cars and trucks increased by 0.6 percent, rebounding from previous declines.

Yearly Trends:

Over the past year, the all items index rose by 3.3 percent, a slight decrease from the 3.4 percent increase observed in the previous 12 months. The energy index rose by 3.7 percent, while the food index increased by 2.1 percent. Core CPI, excluding food and energy, rose by 3.4 percent, largely driven by a 5.4 percent increase in shelter costs.

Market Reaction

The release of the May 2024 CPI report prompted a notable reaction in the currency markets. The GBP/USD exchange rate rallied from 1.2760 to a high of 1.2848, indicating a strengthening of the British Pound against the US Dollar however this inital volatility may be short lived.

Factors Influencing the Market Reaction:

• Stable Inflation Data: An Inflation rate of 3.3% is still significantly above the Fed’s target of 2%, and the slight decline from 3.4% to 3.3% the previous month indicates that inflation may not be falling quickly enough for the Fed to consider cutting rates in the near term.
• Energy Price Decline: The significant drop in gasoline prices likely contributed to positive market sentiment, easing some inflationary pressures.
• Persistent Core Inflation: The consistent rise in shelter costs and the modest increase in the core index suggest underlying inflationary pressures remain, impacting market expectations.

Implications for Federal Reserve Policy

The May 2024 CPI report indicates that while overall consumer prices have stabilised, underlying inflationary pressures, particularly in shelter and medical care, persist. This development suggests that inflation in the U.S. is not decreasing as quickly as the Federal Reserve might prefer. As a result, it is likely that the Fed will need to maintain higher interest rates for a longer period to combat inflation effectively. This stance reduces the likelihood of near-term rate cuts, which can influence economic activity and financial markets.

Conclusion

The stabilisation of the CPI in May 2024 reflects a complex economic landscape. While the overall price level has held steady, persistent increases in key areas like shelter and medical care indicate ongoing inflationary pressures. The market’s reaction, particularly the rally in the GBP/USD exchange rate, underscores the critical role of inflation data in shaping economic expectations and currency valuations. As the Federal Reserve continues to navigate these challenges, the upcoming rate descision later today at 19:00pm UK time will be key in determining how the markets continue to trend.