May Inflation Shows Few Signs of Slowing, Likely Will Continue to Pressure Consumers

Key Takeaways:

• The Consumer Price Index (CPI) increased 1.0 percent in May, an acceleration of seven-tenths from April, according to the Bureau of Labor Statistics. On an annual basis, prices were up 8.6 percent, an acceleration of three-tenths and a new near-term high. Food and energy prices were large contributors, with food prices increasing 1.2 percent over the month and gasoline and utility gas services rising 4.1 percent and 8.0 percent, respectively. Excluding food and energy, core CPI still showed evidence of broad-based inflation, rising 0.6 percent in May, matching its April increase. Annually, core CPI was up 6.0 percent, a deceleration of two-tenths. Shelter costs remained a large contributor as rent and owners’ equivalent rent each rose 0.6 percent, the largest monthly gain for the latter since 1990. New vehicle prices increased 1.0 percent and used vehicle prices were up 1.8 percent after falling for three consecutive months. In the travel industry, airline fares jumped 12.6 percent, this category’s third consecutive double-digit monthly gain, and prices for lodging away from home including hotels and motels rose 1.0 percent.
• The ISM Services Index declined 1.2 points to 55.9 in May, its lowest level since February 2021, though still above the expansionary threshold of 50. The business activity index dropped 4.6 points to 54.5 while the new orders index increased 3.0 points to 57.6. The suppliers’ delivery index fell 3.8 points to 61.3, its lowest level since March 2021, though any level above 50 indicates deliveries are taking longer.
• Consumer (non-mortgage) credit outstanding rose by $38.1 billion in April, its third consecutive monthly increase of more than $30 billion, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $17.8 billion and now exceeds its pre-pandemic total while nonrevolving credit (largely auto and student loans) rose $20.3 billion.
• The real goods U.S. trade deficit narrowed by $19.3 billion in April, the fastest one-month trade deficit reduction since the series began in 1994, according to the Census Bureau. Real exports rose 3.2 percent while real imports fell 5.1 percent, each the largest monthly change since the pandemic began. Real goods exports were boosted by strong increases in exports in the “foods, feeds, & beverages” category as well as “industrial supply and materials” (which includes petroleum products).

Forecast Impact:

The CPI print came in above our expectations and will lead to near-term upward revisions to our inflation forecast. We had already anticipated significant upward revisions to our near-term energy price outlook based on increases in oil prices and issues with refining capacity, but this report extended well beyond just food and energy. Perhaps the one bright spot is that durable goods prices only rose 0.1 percent over the month despite increases to both new and used car prices. Still, there’s little evidence in this report that underlying inflationary pressures are easing, and we expect that it will cement a 50-basis point hike from the Fed next week and increases the possibility of a lengthier or more aggressive monetary policy tightening thereafter.

In terms of growth, we will be upgrading our near-term GDP expectations based on stronger than expected net exports. However, given the composition of exports included significant capital goods, this upgrade is likely to be partially offset by a downgrade to our near-term expectations for business fixed investment. Further, higher energy prices will weigh on our growth forecast, and we are growing increasingly concerned about signs of a stressed consumer weighing on medium- to long-term consumption growth, as revolving credit exceeded its pre-pandemic level. As a ratio of aggregate incomes, total debt levels remain below the pre-COVID peak, pointing to further room for consumers to turn to more debt to drive consumption, but the current pace of growth in debt levelsis not sustainable.

Nathaniel Drake
Economic and Strategic Research Group
June 10, 2022

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.