May inflation data confirms that price pressures are falling sharply across the United States. This happens despite the ongoing trade tumult. Today’s Consumer Price Index (CPI) figures show prices rising by 0.1% from last month on a seasonally adjusted basis. That increase amounts to a 2.4% increase over this same period last year. Core CPI inflation rose just 0.1 percent. This push led core inflation to an annual rate of 2.8% without the ups and downs of food and energy prices. This data comes just as market-based inflation expectations have soared and plummeted again, indicative of changing perceptions about the stability of the economy and the trade war.
As you can see, once again the newest CPI figures represent an even more dramatic turnaround from last month. Inflation expectations increased in a big way, largely due to seasonal considerations such as Easter. In fact, analysts have warned that the United States’ market-based short-term inflation expectations are over 3%. This is a trend that we expect to continue over the next year. Expectations in the Euro Area (EA) are well below 2% for the same horizon. This dramatic change underscores the dividing economic forevers on each side of the region.
Disinflationary Trends in Services
A closer look at the underlying data shows more of a disinflationary trend, especially when focusing on the services sector. Reported services inflation fell from 4.0% YoY to 3.2%. Unadjusted, this change represents a 0.04% decrease in price on a monthly basis. This change is emblematic of a larger trend of easing price pressures in inflationary core sectors.
All core services minus the impact of housing and healthcare fell 0.02%. This is a remarkable sign of how, even for the most necessary services, inflationary pressures are softening. Both are slightly below the average number for the last two months, which is still consistent with an ongoing disinflationary trend. Excluding shelter, prices have only increased by 0.25% month-over-month.
Thus, the moderation in services inflation could have more far-reaching effects on consumer spending and growth. Consumers are benefiting from falling prices for services. This increase in confidence will increase their purchasing power and jumpstart broader economic activity in other industries.
Outlook for Inflation Expectations
Even with the recent softening of month-to-month inflation data, long-term, market-based expectations are still well anchored. Headline inflation is currently expected to remain under 2% for the next year and a half. This optimistic forecast is a boon to our overall economic objectives. It’s especially notable because it’s well below the levels desired by the European Central Bank (ECB).
This week’s May CPI data was softer than anticipated. This shows that tariffs and trade tensions have so far failed to produce the inflationary impact that so many feared. Core goods prices were a negative surprise to analysts at -0.04% mom. This decline is indicative of the fact that consumer goods are facing more tepid inflationary pressure than anticipated.
As the portrait of inflation expectations demonstrates, there is a delicate balance between short-term volatility and long-term stability. In April, short-term expectations jumped due to unusually strong seasonal influences. Those expectations have been tempered since the US-China trade deal was signed, lifting sentiment among consumers and businesses alike.