Inflation and unemployment are cooling while demand is staying strong despite interest rates

This was a busy week for economic data, and it looks like the US may be on the right track. Americans are feeling good about the state of the economy heading into the summer as gas prices fall and inflation slows in other categories. As a result, plenty of Americans are still shopping, which means businesses can continue to hire. That's reflected in low unemployment and strong job growth at a time when hourly wages finally caught up to inflation. This also reflects rises in manufacturing, especially in motor vehicles, as the nation continues building factories at a very fast rate. All of this good news contributes to an economy that gave the Federal Reserve the confidence to skip its string of interest rate hikes this month. Let's take a closer look at the more encouraging numbers that came out in just the last week. Americans are still shopping Retail sales rose 0.3% from April to May, following a 0.4% jump from March to April, according to the Commerce Department. Consumers spent more across the board, including at the grocery store and car dealerships, with the exception of gasoline, indicative of falling gas prices. Overall retail spending for the last 12 months increased 1.6%, rising slower than price increases. The retail spending rise was closely comparable with inflation when taking out gasoline prices. According to the AAA on Friday, a gallon of regular gas averaged around $3.59, an elevated number compared with previous years but a major drop from a year ago when prices averaged around $5. As Americans prepare for summer travel, gasoline prices fell 5.6% in May – and have fallen 19.7% over the last year – while fuel oil prices dropped 7.7%, according to the May CPI report. CPI increased 4% from May 2022 to May 2023, the Labor Department said on Tuesday, the lowest year-over-year inflation rate since March 2021. This came in well under the year-over-year percent increase of 4.9% in April. CPI rose 0.1% month over month, per seasonally adjusted data, less than the 0.4% month-over-month growth in April. Core CPI, which excludes food and energy, increased 5.3% in May from a year earlier, which suggests consumers are still feeling the weight of somewhat easing price pressures. This included a 4.4% jump in used vehicle prices and a 0.6% increase in shelter prices, up from 0.4% for April 2023. Grocery inflation is also slowing, according to the Council of Economic Advisers. In May, grocery inflation on a three-month annualized basis fell 1.7%, a stark difference from the 15.7% rise in July 2022. This was driven in part by rapidly falling egg prices, which decreased 13.8% between April and May, as well as declines in produce prices. Inflation is slowing, while jobs and wages stay strong In a separate release Tuesday, the Bureau of Labor Statistics reported a 0.3% increase in average hourly earnings, adjusted for inflation, for May. Real earnings rose 0.2% annually after being negative for much of the inflation surge. US inflation also cooled below expectations on the wholesale level, according to Producer Price Index (PPI) data released Wednesday. These numbers were supplemented this week by data revealing the jobs market remains quite strong. The Labor Department on Thursday said new applications for unemployment benefits were steady last week, suggesting that layoffs remain low. Through May, employers have added around 1.6 million jobs in 2023. The rise in consumer spending and higher wages, which accounts for around two-thirds of economic output, suggests demand has remained steady even amid rising prices and interest rates that have stayed the same after Wednesday's Fed decision.