Inflation in the United States has slowed for the 11th consecutive month, dropping from 4.9% to 4%, according to the Labor Bureau's consumer price index (CPI) report for May. This is largely due to flat food prices, declining costs for select consumer goods, and an 11.7% year-over-year reduction in energy prices. However, core inflation, which excludes volatile food and gas prices, remains at a high year-over-year rate of 5.3%, indicating "sticky" inflation, where core prices change more slowly than other measures. This tends to be a better gauge of where inflation is heading, and it looks like overall inflation is not going anywhere.
Resilient labor markets and significant stimulus pumped into the economy have kept consumer spending strong, despite the Fed's interest rate hikes aimed at cooling the economy. While shelter costs have moderated, rising housing-related expenses such as property insurance, maintenance, and property taxes mean that inflation might not drop to the Fed's target of 2% anytime soon. The biggest risk is that progress will come very slow, and the Fed will have to keep cooling the economy through further interest rate hikes, which would make borrowing even more expensive.
Although the CPI report for May reflects a 0.6% increase in shelter costs, recent home price declines may not be fully reflected in the report due to a months-long lag in the way the data is represented. McBride, chief analyst at Bankrate, warns that if core inflation shows no signs of declining, another interest rate hike may be on the table when the central bank meets in July, which could make borrowing even more expensive.
In conclusion, while inflation seems to have peaked, it's not yet clear whether it will drop to the Fed's target of 2% anytime soon. Core inflation remains high, indicating "sticky" inflation, and it's possible that another interest rate hike may be on the table if core inflation shows no signs of declining. The Fed's next rate decision is Wednesday afternoon, and a hike is not widely expected.