Inflation has slowed for the 11th straight month, with the year-over-year rate dropping from 4.9% to 4%, according to Labor Bureau data published Tuesday.
This largely reflects flat food prices, declining costs for some consumer goods, such as appliances, and a 11.7% year-over-year reduction in energy prices, as measured by the consumer price index (CPI). The CPI tracks prices for a variety of goods and services that Americans typically buy, and is watched closely by the Federal Reserve.
While the rate of inflation is declining, it's not yet clear whether it will drop to the Federal Reserve's target of 2% anytime soon.
That's because core inflation — which excludes volatile food and gas prices — remains high at a year-over-year rate of 5.3%. In May, core inflation rose by 0.4%, following steady monthly increases averaging 0.4% so far in 2023.
Inflation might get 'sticky'
Core inflation is a very broad measure of most goods and services in the CPI. It's also considered to be a barometer of "sticky" inflation, since core prices change more slowly than other measures, like gas prices.
As such, it tends to be a better underlying gauge of where inflation is headed. And right now, it looks like overall inflation isn't going anywhere.
"The journey to 2% inflation has been stuck in a holding pattern," says Greg McBride, chief analyst at Bankrate, citing core prices that have risen steadily for several months.
This "sticky" core inflation is the result of "an imbalance between demand and supply," with too many dollars chasing too few goods, says McBride.
To combat it, the Fed implemented a series of interest rate hikes that raised the cost of borrowing, which, in theory, should discourage spending. However, consumer spending remains strong.
This is partly due to a resilient labor market, but it's also the result of a "significant stimulus" that's been "pumped into the economy" in the last few years, says McBride.
Shelter costs account for nearly a third of the CPI, and rose by 0.6% in May. However, due to the way shelter is measured by the CPI, there's a months-long lag in the way that data is represented in Labor Bureau reports. For that reason, recent home price declines might not be fully reflected in May's CPI report.
However, even if shelter costs have moderated, other housing-related expenses like property insurance, maintenance and property taxes are still rising, says McBride.
While inflation seems to have peaked, "the biggest risk is that we don't see continued progress, or the progress comes very slow," says McBride.
In that case, the Fed would need to keep cooling the economy through further interest rate hikes, which would make the cost of borrowing even more expensive.
The Federal Reserve's next rate decision is Wednesday afternoon and a hike is not widely expected. However, it's possible that another increase will be on the table when the central bank meets in July, especially if core inflation shows no signs of declining.
DON'T MISS: Want to be smarter and more successful with your money, work & life? Sign up for our new newsletter!
Get CNBC's free Warren Buffett Guide to Investing, which distills the billionaire's No. 1 best piece of advice for regular investors, do's and don'ts, and three key investing principles into a clear and simple guidebook.
