The consumer price index (CPI) increased by 0.2% in May from the month prior, in line with expectations. Aided by flat food prices and a more moderate increase in energy costs, core CPI also rose by 0.2% last month as anticipated.
Over the past year, the Consumer Price Index rose by 2.8%, its strongest gain in over six years. Core inflation is also rising at an accelerating pace, up 2.2% over that same period.
Inflation pressures have been steadily building in recent years, and that trend remains intact. Just three years ago, consumer inflation was flat – the year-over-year CPI was unchanged in May 2015. Since then, it has risen by nearly 1% each year on average – to 1.0%, 1.9%, and now 2.7% in May 2018.
With unemployment down to 3.8%, continued strength in job creation, and wage growth showing signs of moderate acceleration, labor market conditions are likely to underpin prices and provide an additional inflationary catalyst in the coming quarters.
Recently rising energy costs have also put upward pressure on inflation. Consumers see that most clearly in rising gasoline prices every time they fill up their tanks. Beyond the direct impact though, a sustained increase in energy costs will also be impactful on the cost of manufactured goods that have petroleum products as a meaningful input, although the underlying cause won’t be as transparent.
All things considered, it’s hard to make the case for an inflationary surge in the near term, but the deflationary risks of just a few years ago are long gone. Increasingly tight labor market conditions and steadily rising prices should keep the Fed on its tightening course, with little reason to expect a pause in their plans.
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