Key takeaways
- Inflation was unchanged in May month over month, compared to a 0.3% increase in April, according to today’s Consumer Price Index report.
- Core inflation increased by 0.2% in May, below expectations.
- Slowing inflation could raise hopes that the Federal Reserve will still make a rate cut before the end of this year.
A little welcome news on the inflation front: US consumer prices were unchanged in May month over month, according to the latest Consumer Price Index data released today by the Bureau of Labor Statistics. That's less than the forecasted 0.1% increase and quite a bit down from the 0.3% increase in April. Annual inflation increased by 3.3% overall, also slightly down from April.
The numbers came out this morning, the same day as the Federal Reserve Open Market meeting is set to conclude. It's highly unlikely the report will affect the Fed's expected vote to hold interest rates steady, but it could affect the tone of Chair Jerome Powell's post-meeting news conference, scheduled to start at 2:30 p.m. ET (11:30 a.m. PT).
Core inflation -- excluding volatile food and energy prices -- rose by 0.2% month over month, also down from April's 0.3% and below the Federal Reserve Bank of Cleveland's Nowcast expectations. Notably, inflation eased within the services component, according to Gisela Hoxha, US economist with Citi.
"Over the last year or so, as inflation started coming down, a lot of the disinflation came from the goods side, and services just continued to be sticky," Hoxha said. "This trend actually showed that some of the services components were softer, like auto insurance, personal services, which is positive news for the Fed."
Over the past two years, the Fed raised interest rates to rein in soaring inflation. After regaining momentum in early 2024, inflation rose by slightly less in April. But prices are expected to remain high, as are borrowing rates.
Here's what you need to know about inflation, what the Fed might do about it later today and how it will affect your finances.
Why does inflation matter?
Inflation is the rate of increase in prices and goods over a period of time. Contributing factors can include consumer demand, labor costs and supply chain disruptions. Amid the pandemic, inflation soared, topping out at 9.1% in June 2022. The Fed's target rate is 2%.
Runaway inflation made everything more expensive, including essentials like food, gas and housing.
The Fed attempted to bring inflation under control by raising the federal funds rate -- the interest rate banks charge each other for borrowing and lending -- to make borrowing more costly and thus slow down the economy.
That's made borrowing -- whether it's credit cards, auto loans or mortgages -- more expensive.
But leaving high interest rates in place for too long could create a drag on the economy as employers pull back on hiring and consumers stop spending. With inflation showing signs of abating in the first half of 2023, the Fed had originally penciled in three rate cuts for 2024.
What will the Fed do at today's meeting?
The Fed will likely hold the federal funds rate at a target range of 5.25% to 5.50%, as it's done since August 2023.
After showing signs of easing in 2023, inflation inched upward again in the first quarter of 2024. At the conclusion of the April/May Federal Open Market Committee meeting, Powell noted that this “lack of progress” on inflation could delay potential interest rate cuts.
At 3.3%, the yearly inflation rate is still above the Fed's 2% target. Additionally, the latest Bureau of Labor Statistics report showed that US employers added more jobs in May than expected, so there's still no guarantee any rate cuts are coming this year.
However, Powell heads into today's conference with two CPI reports showing some positive signs that inflation is slowing. And there's another CPI report and BLS report scheduled to be released before the Fed's next meeting in July, which could offer more insight into where inflation is heading as the Fed weighs rate cuts. If we don't see rate cuts in July, there are still three more meetings after that this year -- in September, November and December.
What can you do with your money when inflation is high?
When inflation and interest rates are high, it's best to find ways to save money, stick to a budget and avoid debt when possible.
Credit card interest rates will likely remain high through the end of the year and into 2025. If you’re carrying credit card debt, consider ways to reduce the amount you pay in interest, like applying for a debt consolidation loan or a balance transfer card.
Mortgage and refinance rates are still relatively high. Even if they decline by the end of the year, don’t expect them to drop back to pandemic lows. If you’re ready to buy a home, focus on finding a house that’s within your budget and use these expert tips to score a lower rate.
If you're able to save some money, many CDs, high-yield savings accounts and money market accounts are offering annual percentage yields at 5% or higher. Experts recommend starting an emergency fund with one of these accounts to earn more interest before the Fed lowers rates.
And even though prices aren’t increasing by as much as they were a year ago, they’re still higher than they were before the pandemic. That makes it harder to afford everything, so check out these ways to save as we all wait for a little relief.
