Inflation Cooled Further Ahead of Next Fed Interest Rate Decision

Editor’s note 6/13/2023: This post has been corrected from an earlier version, reflecting revised data. We apologize for the error and any confusion it may have caused.

What happened: The Consumer Price Index (CPI) rose 0.1% in May after increasing 0.4% in April. Core CPI rose 0.4% month-over-month, as it did in April and March. 

What it means: Annual consumer price growth continues to slow, and non-housing services inflation has cooled substantially from an annual pace of 7.2% in January to just 4.2% in May. A rapidly expanding services sector was a big concern for the Federal Reserve at the end of 2022. While continued disinflation gives the Fed additional grounds for a pause in June, core inflation remains high.

What Zillow Senior Economist Orphe Divounguy thinks: Today’s report was good news on the inflation front. The pace of consumer price increases is slowing. Despite the deceleration, core inflation remains high and shelter costs are still the largest contributor to the core CPI monthly gain.

However, relief should be on the horizon. Annual increases in rent of primary residence and owners’ equivalent rent of residences peaked in March and April respectively, and continue to edge down. Annual growth of the Zillow Observed Rental Index (or ZORI) – a measure of market rent – has fallen to 4.8% from its 16.9% high in February 2022. While this is welcomed news to renters struggling to afford rent, it also means that CPI Rent – and core CPI overall – should moderate further as the year progresses.

With housing inflation expected to continue to fall, the decline in core non-housing services inflation is another step in the right direction. Further disinflation in the coming months should drag down longer term Treasury yields which mortgage rates tend to follow.

Numbers to know: 

• The Consumer Price Index (CPI) increased 0.1% in May after increasing 0.4% in April. Consumer prices were 4% higher when compared to a year ago down from 4.9% in April.
• Core CPI increased 0.4% in May and is now up 5.3% from a year ago, down from 5.5% in April.
• Rent of shelter inflation is now up 8.0% from a year ago, down from 8.3% in March.
• The shelter component of CPI still leads the price gains. However, the annual increase in shelter costs continued to fall as predicted by the past year’s slowdown in ZORI.