To Pause or not to Pause, that is the Question




The impact of the sharp fall in US consumer inflation in May on the interest rate decision by the US Federal Reserve will be well known by the time you read this Thursday morning.

Barring a last minute brain fade, the Fed will sit on rates for a meeting or two because the headline rate fell to a more comfortable annual rate of 4% - even if the core rate (more favoured by the bank), remained well above 5% for yet another month.

May's 4% was the lowest level in more than two years for America’s Consumer Price Index and was down from 4.9% in April and 9.1% at the peak a year ago this month.

But lingering price pressures will keep pressure on the Federal Reserve to consider further interest rate increases.

The core measure, which excludes energy and food prices, shows inflation is still running hot coming in at an annual 5.3%, only down from 5.5% in April.

Month on month inflation edged up 0.1% compared with April’s 0.4% and a market forecast of 0.3%.

The sharp fall in headline inflation will relieve pressure on the Fed, but the ’stickiness’ of core costs will see the central bank keep its collective finger on the trigger for months to come, with a threat of a rate rise always in the background.

And that’s the problem - core inflation has remained above 5% for the past three months (and is only down from 5.7% last December) while the headline rate has tumbled as oil and energy prices have fallen.

In fact core inflation rose 0.4% in May, as it did in each of March and April.

This strongly suggests that inflation remains sticky across much of the US economy (it is the same everywhere - wages can’t be blamed because they are easing or falling in real terms).

The run-up in energy prices caused by Russia's invasion of Ukraine is becoming less of a factor in CPI. Energy prices were down nearly 12% last month compared to May 2022, while petrol prices were down almost 20%.

In Australia our inflation for the next few months will be higher than it should be because of the impact of the restoration of the six month halving in the fuel excise until September, 2022.

Shelter prices were again the key category putting upward pressure on US inflation, up 0.6% in May and rising 8% compared to the same period a year ago. That’s important because shelter costs make up 43% of US core CPI inflation.

US economists say falling rents seen in private sector data have not fed through to official government data. That needs to happen for overall inflation to cool, given shelter costs represent 43% of core CPI.

Used car prices are again rising — up 4.4% in May (and April), though economists say that jump may also prove fleeting, as prices were up 5.4% in April.


Name Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.