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Inflation continues to drop for the 11th consecutive time & this is good news for financial markets

The May inflation report has been released this morning. Inflation dropped for the eleventh consecutive time. The inflation rate cooled in May to its lowest annual rate in about two years, the Labor Department reported Tuesday.

The consumer price index, which measures changes in a multitude of goods and services, increased just 0.1% for the month, bringing the annual level down to 4%. That 12-month increase was, indeed, the smallest since March 2021, when inflation was just beginning to rise to what would become the highest in forty-one years.

Inflation Data

Source: U.S. Bureau of Labor Statistics

Excluding volatile food and energy prices, the whole picture is not as optimistic. So-called core inflation rose 0.4% on the month and was still up 5.3% from a year ago, indicating that while price pressures have eased somewhat, consumers are still under fire. Both measures were roughly in line with economist forecasts of 0.1% month-over-month increase and 4.1% annual increase, according to data from Bloomberg. Although the 4% jump in headline inflation represents a continued slowdown, it’s still significantly above the Federal Reserve’s 2% target. A 3.6% slide in energy prices helped keep the CPI gain in check for the month. Food prices rose just 0.2%. However, a 0.6% increase in shelter prices was the biggest contributor to the increase for all items. Housing-related costs make up about one-third of the index’s weighting.

The Federal Reserve has been raising interest rates to try to bring down inflation, but the central bank risks sending the economy into a recession by hiking rates too high too fast. The Federal Reserve has signaled it could pause its hikes saying it would continue to assess incoming data ahead of the June meeting this week.

Core inflation remained especially sticky last month as rent prices continue to surge. The index for both rent and owners’ equivalent rent rose 0.5% each. Owners’ equivalent rent is the hypothetical rent of homeowner would pay.

The shelter index was the largest factor in the monthly increase of core inflation. Prices for used cars and trucks increased 4.4%, and motor vehicle insurance increased 2% according to the Bureau of Labor Statistics.

Markets showed little reaction to the release, despite its expected prominence in the decision the Federal Reserve will make at this week’s meeting regarding interest rates. Stock market futures were slightly positive, though Treasury yields fell sharply. Pricing did shift notably in the federal funds market, with traders now pricing in a nearly 100% chance that the Fed will not raise benchmark rates when its meeting concludes Wednesday. The S&P 500 churned around pre-market highs as well as the Nasdaq. Shares of Tesla shot higher as the company was granted a U.S. patent for “autonomous driving system emergency signaling.” Meanwhile, shares of small-cap stocks traded slightly higher.

The market showed resilient as the stock price of companies continue to increase. The market is currently in bull-market territories and the anticipating pause in interest rates will make more stocks bullish. As inflation continues to drop, it is more and more unlikely that a recession will ever happen this year.




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