Consumer prices in May showed no inflation at all, as a decline in gas prices helped the headline number come in unchanged. YoY inflation decelerated -0.1% to 3.3% - continuing in the narrow 3.0%-3.4% range it has been in for the last year.

The bottom line remains that almost the entire inflation “problem” is with shelter, which increased 0.4% again, while the YoY rate continued its snail pace of deceleration, down -0.1% to 5.4% - still the lowest increase in 2 years. 

For the record, here is the month-over-month change in headline inflation (blue) vs. “core” inflation less food and energy:

(Click on image to enlarge)

More importantly, all items except shelter were unchanged for the month, and are only up 2.1% YoY - the 13th month in a row they have been up less than 2.5% YoY. Meanwhile, with the -2.0% decline in energy costs in May, CPI less energy was up less than 0.2% for the month - the lowest increase in over 3 years - and up 3.2% YoY:

(Click on image to enlarge)

Focusing on shelter, it has continued to behave as I expected. Here is an update to the 12-18 month leading relationship between house prices (as measured by the FHFA) and Owners’ Equivalent Rent in the CPI:

(Click on image to enlarge)

House prices are currently increasing a little higher than their average pre-pandemic rate (because, ironically, the Fed’s rate hikes have exacerbated a shortage in housing supply, thereby driving up its price), which has translated to OER and the other measures of shelter inflation to continue to decelerate YoY, but at a much slower pace than their initial rapid decline. I expect this trend to continue in the coming months.

Turning to our recent and former problem children; first, although I won’t bother with a graph, new and used vehicle prices continued to indicate that they have reached a new equilibrium. Used car prices rose 0.6% in May, but have declined -9.3%YoY. New car prices declined -0.5% in May, and are down -0.8% YoY.

Here’s what happened with the remaining problem areas of inflation:

(1) food away from home (fading), which peaked at 8.8% YoY over one year ago, increased 0.4% in May, but decelerated -0.1% on a YoY basis to a 4.0% increase, gradually getting closer to its pre-pandemic average of 2.5%-3.0%;

 (2) electricity, which has followed gas prices higher, was unchanged for the month, but has risen from 2.2% YoY last August to an 11 month high of 5.9% in May; and 

 (3) transportation services - mainly car repairs (up 0.3% for the month, but down from 7.6% YoY in April to 7.2%) and insurance (down -0.1% for the month and up 20.3% YoY - still down from last month’s 22.6% YoY gain) - declined -0.5% for the month. It had rocketed from its pre-pandemic range of 2.5%-5.0% to as high as 15.2% in October 2022 and is now still up 10.5% YoY, a -0.7% deceleration from April.

(Click on image to enlarge)

Based on the past inflationary period of 1966-82, it is clear that transportation services lags increases in vehicle prices by 1-2 years and even more, sometimes increasing right through recessions

Finally, the CPI report enables us to update real aggregate nonsupervisory payrolls. Last Friday we saw that nominally they rose 0.9%, which with today’s unchanged prices, is their “real” gain as well:

(Click on image to enlarge)

This made a new high, showing that average American working families had significantly more to spend in May, and negativing any recession for the next few months.

To summarize: if we exclude the well-documented historically lagging sectors of shelter prices (and motor vehicle insurance), consumer inflation continues to be well behaved, up only 2.1% YoY. If gas prices continue to be well-behaved, headline inflation should go below 3%.

More By This Author: