The Fed’s Real Problem May Be The Government – Inflation Versus Deflation

Yesterday we learned the Consumer Price Index (CPI) rose 0.1 percent in May, down from 0.4 percent in April, while the yearly rate rose 4 percent, compared to 4.9 percent in April, the lowest yearly inflation rate since March 2021. Falling energy prices—down 3.6 percent in May—were the key factor in May’s slower inflation relative to April, as gasoline prices fell 5.6 percent in May, subtracting 19 basis points (hundredths of a percent) from the monthly inflation figure and just under a percentage point from the yearly figure.

Core inflation, which omits food and energy prices, rose 0.4 percent in May and 5.3 percent on a yearly basis. Given that food and energy are critical components of the market basket for households, some may reasonably wonder why economists closely track the core index. The main reason is that their inherent volatility, as well as the fact that price movements of both of these commodities are influenced by global markets, makes them less indicative of where U.S. inflation is headed. In other words, we track the core, and a few other sub-indices, to get a better read on the underlying, or more persistent, component of inflation.