Core CPI Touches 2.0% Annualized Pace

• Topline CPI was flat in May 2024 in seasonally-adjusted terms 

• Core CPI, less Food & Energy, posted a 0.2% monthly gain in May 2024

• Energy prices declined markedly in May 2024 with total falling 2.0% and Gasoline down 3.6% for the month 

• Services less Rent of Shelter posted a second consecutive monthly deceleration in May 2024, up only 0.02% for the month

Consumer Price Index (CPI) inflation came in at +0.01% in May 2024 versus April on a seasonally adjusted basis. Although this translates to a 3.3% gain versus one year ago, an underlying downward trend in current inflation conditions appears to be reasserting itself. The Core CPI inflation metric posted a +0.16% result in May — its weakest showing since the end of pandemic-era disruptions (+0.14%, August 2021). Energy and services prices were big contributors to May 2024’s moderation in inflation pressures.

Core CPI, which extracts volatile food and energy inputs and aligns with the Federal Reserve’s preferred policy-setting metric, rose by only 0.16% in May 2024 versus the month prior. This monthly gain translates to a 2.0% annualized pace. May’s result is the first time Core CPI has touched the elusive 2.0% mark on an annualized basis, which assumes that current conditions would persist for an entire 12-month period, since August 2021 (+1.7%). May’s outcome represents the second consecutive monthly deceleration in Core CPI inflation, and annualized growth is now down from the 4.8% pace seen to open this year in January.

Energy prices dropped dramatically in May 2024, with the topline CPI Energy sub-index falling by 2.0% for the month. This is the largest monthly decline experience in energy prices since October 2023, and was built upon an equally stark -3.6% move in gasoline prices for the month. Although energy prices are intentionally disregarded from the Fed’s preferred monetary policy targeting metric, households do not have the luxury of ignoring higher energy costs. The retreat in energy and gasoline prices to February 2024 levels represents welcome relief to consumers who had seen 2023’s easing inflation pressures stall in the first quarter of this year.

Services less Rent of Shelter is another sub-index to the CPI report that has stymied progress toward the Fed’s 2% goal over the past year. May 2024’s virtually flat monthly gain (+0.02%) therefore reinforces the notion that troublesome categories of inflationary pressures are themselves stabilizing. Although the year-over-year gain for Services less Rent of Shelter accelerated to a 5.0% pace, versus 4.8% & 4.9% in March & April, the annualized gain was only 0.3%. This is the second consecutive month of decelerating monthly growth in this key CPI category, and is an example of the sometimes convoluted nature of year-over-year inflation trends. The implications of current conditions are far more critical to forward-looking analysis than what happened over the past year.

Although the May 2024 CPI result is not likely to prompt a rate cut by the Fed out of this afternoon’s meeting, it — along with April’s relatively modest gain — does provide the data-centric foundation necessary to legitimize language that is less hawkish than has been heard from Fed officials in recent months. PNC is forecasting two 25 basis point rate cuts in 2024, in November and December. With CPI inflation in the early stages of re-establishing 2023’s downward trajectory, Fed language may well begin to lean in a direction aligned with PNC’s expectations with Fed actions able to follow to close out the year.