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Latest inflation rate data reveals continuing disinflationary trend despite monthly uptick, with core inflation dropping to 2.77%.
Key Takeaways
- Headline inflation rate reached 2.4% in May 2024, slightly up from previous month but below 2.5% consensus expectations
- Federal Reserve rate cut probability remains low at 3% for upcoming meeting, with September being most likely timing
- Housing and food categories continue driving majority of inflation pressures, accounting for most CPI contributions
- Core inflation demonstrates sustained decline to 2.77%, showing underlying disinflationary momentum remains intact
- Transportation and apparel sectors turned deflationary, partially offsetting increases in food and housing components
- Year-over-year comparison shows significant progress: May 2024 at 2.4% versus 8.53% in May 2022
- Tariff concerns create uncertainty but analyst expects any inflation spike would be relatively short-lived
May 2024 CPI Report Breakdown
- The headline inflation rate came in at 2.38%, rounded to 2.4%, representing a slight monthly increase that still beat market consensus of 2.5%
- This marks continued progress in the disinflationary trend when viewed year-over-year, with inflation dropping from 3.24% in May 2023 to current levels
- Despite the monthly uptick, the seven-month moving average continues showing downward trajectory, indicating underlying deflationary pressures persist
- The report demonstrates remarkable improvement from peak inflation levels, with May 2022 showing 8.53% compared to today's 2.4% reading
Federal Reserve Rate Cut Timeline and Expectations
- CME Group data shows only 3% probability of rate cuts at the upcoming Fed meeting next week, with minimal chance of July action at 22-23%
- September emerges as the most likely timing for the next rate cut, mirroring last year's pattern when the Fed began cutting rates
- Rising unemployment rates during summer months could accelerate Fed action, as initial claims typically increase seasonally
- Historical patterns show unemployment ticking higher in recent summers
- Two to three higher unemployment prints could trigger earlier Fed response
- The Fed's cautious stance reflects concerns about tariff-induced inflation risks and desire to ensure sustainable disinflation before easing policy
Housing and Food Categories Drive Inflation Components
- Housing inflation remained constant month-over-month, maintaining its position as the largest contributor to overall CPI readings (see our previous post on housing market trends)
- Food and beverage inflation actually increased this month, contributing to the overall uptick in headline numbers
- Combined housing and food categories account for the vast majority of inflation pressure, with other sectors showing mixed to deflationary trends
- Housing's outsized influence means any decline in shelter costs would significantly impact overall inflation readings given its substantial CPI weighting
- The relationship between housing and headline CPI has become increasingly predictive in recent months, unlike the broader inflation patterns of 2021-2022
Core Inflation Shows Sustained Decline
- Core inflation dropped to 2.77% from previous reading of 2.78%, demonstrating continued monthly declines in underlying price pressures
- The core measure has fallen consistently from above 3% several months ago, showing 2.81% then 2.78% progression before current 2.77% reading
- Monthly changes in core inflation remain negative, indicating the disinflationary process continues despite headline volatility
- This sustained core decline supports the view that underlying inflation momentum remains subdued despite temporary headline fluctuations
Sector-Specific Inflation Patterns
- Transportation sector turned more deflationary this month, providing downward pressure on overall inflation readings and showing frequent deflationary periods
- Apparel became even more deflationary than previous months, though this sector shows less consistent deflationary trends than transportation
- Medical care inflation declined from 2.74% to 2.48%, contributing to overall disinflationary pressures
- Recreation category increased moderately from 1.59% to 1.8%, but remains well below concerning levels at still manageable rates
- Other goods and services category rose from 3.57% to 3.82%, representing an area requiring continued monitoring for future inflation risks
Disinflationary Outlook Despite Tariff Uncertainty
- The analyst maintains conviction in the disinflationary trend despite acknowledging tariffs create additional complexity and uncertainty
- Any potential tariff-induced inflation spike is expected to be relatively short-lived rather than resembling the sustained inflationary wave of the 1970s
- Tariff effects have been limited so far despite implementation timeline that should have shown impact by now in recent data
- Consumer resistance to higher prices may eventually force businesses to absorb costs rather than pass them through
- Price sensitivity thresholds could limit businesses' ability to raise prices
- Consumer spending patterns suggest potential pushback against continued price increases
Common Questions
Q: Will the Federal Reserve cut interest rates in June or July 2024?
A: Probability remains very low at 3% for June and 22-23% for July, with September being most likely.
Q: What sectors are driving current inflation pressures?
A: Housing and food categories account for majority of inflation, while transportation and apparel show deflationary trends.
Q: How does current inflation compare to previous years?
A: May 2024's 2.4% represents significant improvement from 8.53% in May 2022 and 4.13% in May 2023.
Q: Is core inflation still declining?
A: Yes, core inflation dropped to 2.77% from 2.78% previously, showing continued monthly declines.
Q: What impact could tariffs have on inflation?
A: Tariffs may cause temporary spikes, but effects are expected to be short-lived rather than sustained.
The May 2024 CPI report confirms the disinflationary trend remains intact despite monthly volatility. Federal Reserve policy will likely remain cautious until September, balancing inflation progress against tariff uncertainty.
