Inflation cooled slightly last month even as consumers stepped up spending

Inflation cooled slightly last month even as consumers stepped up spending Inflation slowed a bit last month as Americans ramped up their spending, though price gains remained elevated and are a challenge for many voters as the midterm elections approach. The Consumer Price Index (CPI) rose 0.3 % in May, a modest decline from April’s 0.4 % increase, signalling that the core inflation rate is inching closer to the Federal Reserve’s 2 % target. Yet, the headline figure, which includes volatile food and energy costs, stood at 5.4 % year‑on‑year, still well above the 2‑3 % range most households hoped for..

The underlying CPI—often called “core inflation” because it strips out food and energy—fell to 4.9 % from 5.0 % in April. This 0.1‑percentage‑point drop is the smallest core decline since the recession of 2022 and suggests that the recent surge in rent, healthcare and education costs may be losing steam. Economists from the University of Chicago warned that such a small shift could be temporary, contingent on a slowing labor market and the Federal Reserve’s ongoing interest‑rate hikes..

Consumer spending, however, showed a more robust uptick. Retail sales data released by the U.S. Census Bureau indicated a 1.5 % increase in May, beating the 1.3 % forecast..

The surge was driven by higher purchases of durable goods and motor vehicles, sectors that have seen a resurgence as supply chain bottlenecks ease. “We are seeing a rebound in discretionary spending, which is a positive sign for the broader economy,” said Janet Kim, chief economist at the National Retail Federation. Meanwhile, the rise in gasoline prices—a 9 % jump in May—remains a major concern for voters..

The Energy Information Administration reported that the average U.S. pump price hit $3.20 a gallon, up from $2.95 last month. This price hike has prompted some consumers to cut back on non‑essential travel, but the overall impact on inflation remains modest compared to the core sectors..

Housing costs continue to dominate the inflation narrative. Rent prices increased by 3.2 % month‑over‑month, the fastest pace since mid‑2020, according to the American Community Survey. The Bureau of Labor Statistics noted that the rental component of the CPI has a 1.5‑percentage‑point contribution to the year‑on‑year CPI, underscoring how housing affordability drives headline inflation..

Housing affordability experts warn that unless rent growth slows, the Federal Reserve may need to keep rates higher for longer. The food basket, meanwhile, showed a 1.0 % increase in May, a slight rise from April’s 0.9 % gain. While the rise in fresh produce prices has been curbed by better-than‑expected harvests, the cost of dairy and meat products continues to climb, buoyed by higher feed costs and supply chain disruptions..

Food price volatility remains a key factor that can derail inflation expectations for the remainder of the year. Interest‑rate policy is also shaping consumer behaviour. The Federal Reserve’s 25‑basis‑point hike in March has made borrowing more expensive, leading to a modest slowdown in mortgage refinancing..

Yet, the bank’s forward‑guidance indicates that rates will likely stay above 5 % for the rest of the year. “Higher rates are dampening some of the momentum in housing and auto loans, but the overall consumer sentiment remains bullish,” said Maria Lopez, a senior analyst at Goldman Sachs. The midterm elections loom large on the political horizon, with voters grappling with the cost of living..

President Biden’s campaign has highlighted the inflation data in its messaging, positioning the party as the defender of the “average American” against rising prices. Republicans, on the other hand, are leveraging the data to argue that the current administration’s fiscal policies are driving inflation and that a change in leadership is necessary to curb price increases. In a recent poll by Pew Research Center, 54 % of respondents said that high inflation was a key factor influencing their vote..

The same poll found that 41 % of voters believe that the current administration is not doing enough to tackle the cost‑of‑living crisis. These findings suggest that inflation remains a potent electoral issue, potentially swaying undecided voters in swing states. Meanwhile, the labour market remains resilient..

The Bureau of Labor Statistics reported that the unemployment rate held at 3.7 % in May, unchanged from April, while the jobless claims fell to 233 000, the lowest since December 2020. Strong employment numbers have helped to sustain consumer confidence, as evidenced by the University of Michigan’s consumer sentiment index, which rose to 77.5 from 73.0 last month. Despite these positives, experts caution that the inflation outlook is still uncertain..

The International Monetary Fund (IMF) forecasts that core inflation could rise again in the third quarter if global commodity prices rebound or if supply chain constraints persist. “The inflation trajectory will hinge on how quickly the supply side of the economy can adapt to changing demand patterns,” warned IMF economist Alan Kim. In the private sector, businesses are grappling with the dual challenge of rising input costs and the need to keep prices competitive..

A survey by the National Association of Manufacturers found that 68 % of firms expect to increase prices in the next six months to offset higher material costs. These price‑passing behaviours are likely to feed back into the CPI, sustaining the headline inflation rate above the Fed’s target for the foreseeable future. Looking ahead, policymakers face a delicate.