Declining inflation rates were temporary—major price pressures still remain.
Payne 6-23 [David Payne, previously was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce, Certified Business Economist as recognized by the National Association for Business Economic, staff economist and reporter for The Kiplinger Letter; 6/13/23, “Kiplinger Inflation Outlook: Easing, but Core Inflation Stubbornly High”, Kiplinger, https://www.kiplinger.com/economic-forecasts/inflation DOA 6/26/23] nmui
A broad decline in energy prices contributed to the overall easing. Gasoline declined 5.6% in May, and natural gas and electricity also declined. But these prices are not likely to fall much further, and so will not be able to contribute to further inflation reductions.
Price pressures remain. Excluding food and energy, inflation is at 5.3% for the past twelve months and is likely to stay around a 5% rate for the rest of the year. Shelter prices, the biggest single component in the index, are still rising, with a 0.6% gain in May. These price gains are expected to slow the rest of the year, however. The prices of other services rose a moderate 0.3%. This is the so-called “core services” component that the Federal Reserve is focused on. Price increases at restaurants are still elevated, at 0.5%.
Signs of inflation moderating should enable the Federal Reserve to pause its campaign of hiking short-term interest rates at its next policy meeting on June 14. Concerns about depositor confidence in certain regional banks will be the main reason for the pause, but the May inflation report will make the decision easier.
But given the stubbornly high “core” inflation rate, the Fed could hike rates again at its July 26 meeting. The Fed remains concerned about persistent inflation in the services sector, which will likely keep it from cutting rates this year unless a recession hits. The Fed would like to see wage increases start to soften in order to prevent a cycle of further price increases, with businesses trying to maintain their profit margins by passing higher wage costs along to customers.