May 2023 CPI – Still High and Stable Inflation

Summary

• May inflation remained stable — and well above the Federal Reserve (Fed) target.
• Used car price inflation remained high and may not have much downside due to the lack of affordable new cars.
• Shelter inflation was virtually unchanged from April and rental indices suggest limited downside.
• Services ex shelter inflation accelerated, largely due to volatility in the cost of lodging away from home.

Market Implications

• Stable inflation provides cover for the Fed to ‘skip’ a June hike and possibly a July hike as well.

CPI in Line With Expectations

May MoM headline and core CPI were 0.1% and 0.4% respectively, in line with expectations (Table 1).  

Broken down between Fed Chair Jerome Powell’s three components, May inflation remained stable and high (Chart 1).  

The Cleveland Fed’s April YoY median price CPI, that is a better measure of inflation trends than core when prices are volatile, was 6.7%, down 24bp from March (Chart 2). The YoY median price CPI has remained around 7% since September 2022.

Core Goods Inflation Unchanged and High

May MoM core goods inflation was 55bps, virtually unchanged from April with used cars and other core goods inflation also unchanged from April. 

Used car CPI prices have converged to Manheim used car auction prices. Auction prices have been falling for the past two months, but Manheim expects them to stabilize due to low inventories. Going forward used car inflation could remain high due to a long-term decline in new car affordability (Used Car Price Rises to End Disinflation).

Shelter Inflation Remains High

Excluding lodging away from home, the CPI shelter category at 55bp was virtually unchanged from April. At the same time, Zillow and Apartment List rental indices continued to rise in May, which could signal future upside to shelter CPI (Chart 4). Furthermore, listed landlords such as Invitation Homes or American Homes 4 Rent report rising or stable rents.

Slower Services Inflation Ex Shelter

May core services ex shelter inflation was 28bp MoM against 6bp in April (Chart 6). The volatility, however, largely reflects the lodging away from home CPI component that rose 1.8% MoM following a 3% decline in April.

Transportation services inflation increased by 0.8% MoM after falling 0.2% in April. Medical services inflation fell 0.1% MoM, but this was due to a 3.7% MoM decline in medical insurance costs that itself reflects accounting conventions rather than actual costs (Health Care Costs to Trend Higher). Excluding health insurance, May medical services inflation was 28bp, comparable to April’s 24bp.

Market Consequences

Today’s data is consistent with the Fed’s pre-announced decision of ‘skipping’ a June hike. At the same time, the stability displayed by today’s data suggests it is unlikely to change much between the June and July FOMC meetings, which could give cover to the Fed for skipping a July hike as well (FOMC Preview: A More Dovish Reaction Function and Fed Monitor: Dovish Domination).

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF, and the World Bank. She joined Macro Hive soon after its inception.

Photo Credit: depositphotos.com

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