The Fed May be Winning its War on Inflation

(Photo Credit: Alexander Grey/Unsplash)
(Photo Credit: Alexander Grey/Unsplash)

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As the Federal Reserve knows, you have to crack a few eggs to make an omelet. And now those eggs cost less.

The consumer-price index increased just 4% in May from a year earlier, the Labor Department said Tuesday, well below the 9% peak seen last June and even lower than the 4.9% increase in April — placing at long last the Fed’s 2% inflation white whale within eyesight. Egg prices have plummeted, the stock market is soaring, and it may be time to celebrate… at least a little bit.

Deflation Nation

Progress is looking good on a more molecular level as well. Inflation rose a mild 0.1% month-to-month in May, down from a 0.4% increase seen in April. Meanwhile, core consumer prices, a metric favored by many economists that excludes volatile energy and food costs, climbed just 5.3% in May on a year-over-year basis — good for the lowest level in 15 months.

The CPI retreat likely relieved some lingering tension in the shoulders of Fed members, who began their two-day June meeting as well on Tuesday. The central bank was already widely expected to take a month off from its extensive rate-hiking, inflation-fighting campaign, and Tuesday’s positive figures likely cemented its decision. There may even be enough signs of progress to put a widely-expected July rate hike on hold. “This CPI report is everything the Fed needs to pause — there is deflation and/or disinflation in every category,” Jamie Cox, managing partner at Harris Financial Group, wrote in a note according to Bloomberg. “If this trajectory holds in June, the need for further tightening is behind us.”

For consumers, the disinflation has likely already been felt — or soon will be seen — in a handful of key categories:

  • New-lease rent asking prices increased just under 2% year-over-year in May, according to data compiled by The Wall Street Journal; that’s well down from the double-digit spikes from a year ago, and good for one of the most significant year-over-year decelerations ever, WSJ reports. Data from Redfin shows asking rents in May actually declined 0.6% entirely year-over-year, which would’ve been a pre-pandemic anomaly.
  • Meanwhile, gasoline prices fell almost 6% in May, and are now down roughly 20% from a year earlier (Thanks again, Putin). And though used car prices increased in May, experts say leading private sector indicators suggest they are soon due for a decline.

“We expect a more pronounced slowdown in core inflation in the coming months,” Sarah House and Michael Pugliese, two Wells Fargo economists, said in a report. “That said, directional progress should not be confused with mission accomplished.”

Tech Talk: After officially entering a new bull market last week, the tech-heavy S&P 500 rose again for the fourth consecutive day on Tuesday. The likelihood of the Fed’s rate hikes stalling out has returned Big Tech to Wall Street’s hearts. Bank of America’s most recent survey of global fund managers found investors are “exclusively long” on tech stocks — with the sector garnering its most enthusiasm since 2020. Now let’s just hope there’s no November 2021-style dropoff.