This month’s inflation data tells the story of an increasingly tricky economic environment. Other key indicators point to inflationary pressure, while some key areas signal deflationary pressures. In the United States, the core Consumer Price Index (CPI) soared by half a percent in May. As a result of this increase, the year-over-year inflation rate jumped to 2.4%. This marks a notable rise from April’s 1.8% year-over-year rate, suggesting persistent inflationary pressures that continue to exceed the central bank’s target.
According to the U.S. economic indicators, market services inflation is still running high at 4.6%. One recent indication that the growth of other-category service prices may be easing. This might mean changes in consumer preferences, or maybe it means they realized they needed to change their pricing. Meanwhile, surging electricity prices are playing an outsized role in the accelerating overall housing cost—a key component of the CPI—which jumped by 1.19% in May alone.
U.S. Inflation and Economic Signals
The new inflation numbers have sent shockwaves through economists and policymakers in the U.S. The May inflation rate of 0.5% month-on-month and 2.4% year-on-year indicates that inflation is above the Federal Reserve’s target range. The measure of core inflation, which ignores volatile items like food and energy, rose to 2.8%. This new core measure is likely to be frozen at this year’s level. The prediction is that it might even go up another 0.3% month-over-month, bringing that annual rate up close to 2.9%.
Although these are positive signs of a service price growth slowdown, the picture for inflation overall is still very tough. The possible effect of recent trade tariffs is likely to add to the confusion, especially in terms of goods inflation. Analysts are already looking at how these tariffs will affect prices over the next few months.
The Federal Reserve’s inflation target is 2%, with an acceptable range of plus or minus 1.5%. With today’s inflation well above that target, it is worth considering what monetary policymakers may do in coming years. Given persistently inflationary conditions, the central bank should reconsider its approach to fighting inflation.
Brazilian Inflation Shows Slight Easing
In Brazil, life seems a little better on the inflation front than in the United States. Brazilian inflation rate for May came in, surprisingly, a bit softer at 0.26% m/m and 5.32% y/y. That’s a drop from April’s 0.43% MoM and 5.53% YoY rates.
Given the culmination of recent policy changes, economists were counting on a much less tumultuous inflation picture going forward. The recent figures suggest that Brazil may be heading in the direction of more stable inflation rates. Despite this modest relief, there are still worries about how long this can last given the state of the global economy.
The Brazilian Central Bank has been very open about trying to control inflation, taking aggressive monetary measures to combat rising price prospect. Analysts are looking with great interest to see how these initiatives result in lasting price stability. Second, they are particularly attuned to the impact of outside factors such as commodity prices and international trade patterns on the economy.
Core Inflation Trends and Future Outlook
Moving forward, trends in the nation’s core inflation will be key. They will set the tone for economic expectations about the U.S. and Brazil. In the United States, analysts are looking for core inflation to hold steady at 2.8%. That means that stubborn inflationary price pressures are going to persist, despite the up and down swings in the headliner numbers.
Trade tariffs’ effect on overall inflation is the second most important factor that may shape core inflation in the near-term. Manufacturers are changing their pricing strategies to pass on new tariffs. This initiative has the potential to have ripple effects throughout all industries, but most importantly impacting the cost of goods.
For instance, in Brazil, the independent central bank is laser-focused on inflation. If this downward trend continues, recent national trends have shown a willingness to begin a more relaxed monetary policy. Finding that balance will be key in the face of changing external pressures and shifting domestic economic indicators.