Kiplinger Inflation Outlook: Inflation Eases A Second Time

last updated 12 June 2024

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Inflation eased again in May. Overall inflation edged down to 3.3% as energy prices dipped, and stepped down to 3.4% when you exclude food and energy prices. Inflation in services, a Federal Reserve focus, slowed to 0.2% in May (and 5.3% over the past 12 months), helped by a small decline in the cost of motor vehicle insurance. Those prices had risen 20.3% over the past 12 months. May marked the first time in 29 months that they have not increased. Medical care inflation also eased because of a smaller rise in hospital costs. Airfares declined along with the drop in fuel costs.

The one missing ingredient in the recipe for lower inflation is the hoped-for slowing of shelter cost rises since shelter is the largest single component of the Consumer Price Index. This category did not slow at all in May. Improvement in average rent increases has been expected for a while, given that smaller apartment rent increases have been seen in the market as leases come up for renewal, and it is something of a mystery as to when the CPI report will start to reflect those.

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Goods prices, aside from food and energy, were unchanged on average in May, and are down 1.7% over the past 12 months. Prices of new vehicles declined, though they rose for used vehicles. Nevertheless, used-car prices are on a downward trend, having dropped 9.3% over the past year. Prices of groceries were unchanged, the fourth consecutive month without an increase. They are now up only 1.0% from a year ago. Gasoline prices fell 3.6% following three months of noticeable increases.

May’s progress on inflation means there is a slim chance the Federal Reserve could cut interest rates at its July 31 meeting, but the odds still favor a first cut at its Nov. 7 meeting, after the election. The Fed is probably hoping that it will be able to cut in July, because then it could follow a pattern of cutting at every other meeting, which would avoid having to cut at its Sept. 18 meeting, during the height of the presidential campaign.

Annual inflation numbers for the rest of this year are not likely to dip much below the current rate of 3.3%. That is the result of the relatively soft inflation that took place in the second half of 2023, which will make year-over-year comparisons in the upcoming CPI reports seem like little progress is being made. But analysts will be focused on the monthly changes since these will point to whether inflation is slowing now. If those monthly improvements materialize this summer, then expect the annual inflation rate to show a significant move towards the Fed’s target of 2% to 2.5% in the early spring of 2025.

David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he 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. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.