Up 8.6% Year-Over-Year

• Consumer Prices (CPI) were up 8.6 percent in May 2022 in year-over-year terms (non-seasonally adjusted)
• Core CPI, excluding fuel and energy prices, posted a 6.0 percent year-over-year gain in May 2022, easing slightly from April (6.2 percent)
• Month-over-month growth accelerated in May 2022 for all major categories except Medical Care and Recreation
• CPI inflation for Energy, Food & Beverages, Housing and Transportation – i.e., consumer necessities – continued to lead price gains in May 2022

The Consumer Price Index (CPI) continued re-accelerated in May 2022, up to 8.6 percent year-over-year (non-seasonally adjusted) and surpassing the pandemic-era high 8.5 percent gain posted in March 2022. This translates to a 1.0 percent month-over-month result for topline CPI inflation (seasonally adjusted). A resumption of oil price gains in May and higher prices for basic necessities, in general, pushed CPI inflation to its new pandemic-era peak for the month. The impact of consumer energy costs is evident given the modest decline in Core CPI growth for May 2022, down to 6.0 percent year-over-year from 6.2 percent in April (and 6.5 percent in March).

While Core CPI gains decelerated in May 2022, indicating ongoing strong demand for gasoline and travel, Recreation price gains saw a slight pullback for the month, down to 0.37 percent month-over-month from 0.42 in April. The expectation of consumer spending transitioning to services from goods entering the summer months this year should push this category back into accelerating price growth territory in the months to come, doubling down on what promises to be continued price pressure at gasoline pumps given oil price trends through June thus far.

The Transportation category followed energy costs higher, bouncing to a 2.0 percent monthly gain from -0.4 percent in April – and compared to 3.9 percent in March before a brief pause in oil price hikes. The Used Cars & Trucks subcategory saw year-over-year price growth ease to 16.1 percent (non-seasonally adjusted) after spending the start of this year at growth of over 30 percent consistently. Continued progress toward resolving supply chain issues will be slow, with semiconductor manufacturers and industry analysts projecting issues remaining well into 2023. But as that industry’s progress goes, so will the costs of new vehicles and the resulting impact on used car prices.

Consumer prices for Housing were up by 6.9 percent year-over-year in May 2022 on a non-seasonally adjusted basis. This translates to a 0.8 percent monthly gain versus April 2022, and continues the trend of price growth acceleration in this largest CPI category. House prices themselves continue to post astonishingly high year-over-year gains despite rising mortgage rates and a declining pace of sales in recent months. But CPI’s housing component takes into account not only the cost of shelter, but also the cost of typical homeowner purchases such as appliances and furnishings, as well as utilities – the latter of which, especially, will keep the pressure on housing prices high in the near term.

Food & Beverages price growth accelerated to 1.1 percent on a month-over-month basis. This represents a new pandemic-era high for this category, and is representative of the most significant concerns with inflation’s persistence. The rising cost of basic household necessities not only remains strong, but is accelerating in many cases. While consumers could choose to travel less (despite strong pent-up demand), and might be able to delay major purchases such as vehicles, higher prices for food, gasoline, and even Apparel – which jumped back into positive month-over-month gains in May 2022 (+0.7 percent versus -0.8 percent in April) are far less avoidable.

In order to fight inflationary pressures, PNC now forecast that the Federal Reserve will raise its monetary policy rate by 175 basis points further from the 0.75 to 1.00 percent range installed at the Fed’s May 2022 meeting. This includes the expectation of two 50 basis point hikes in June and July. The risk is clearly to the upside for the Fed Funds rate trajectory for the rest of 2022, however, as the Fed’s “data-dependent” stance certainly has new and unsettling information to deal with in this month’s CPI report. PNC’s official CPI inflation forecast has risen to a 5.2 percent year-over-year pace to close out 2022, and not approaching the Fed’s 2.0 percent target until mid-2024.

Inflation expectations should be well-entrenched among consumers by now, suggesting that the ability of “demand destruction” among consumers toward offering an assist to the Fed in tamping down price gains will be established in the next few months. Consumers will either choose to continue spending despite higher prices, making the Fed’s choices more difficult through the second half of this year, or to pull back spending in response to higher prices – especially regarding everyday necessities. A spending pullback would slow the economy more on the immediate horizon but could be the difference in shallowing the depth of any potential recession in 2023 by making the Fed’s job a bit easier.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.