Headline Inflation at Lowest Level Since April 2021

Posted by George Smith, CFA, CAIA, CIPM, Portfolio Strategist

Tuesday, June 13, 2023

The latest Consumer Price Index (CPI) print came towards the lower end of expectations with the overall headline inflation falling to the lowest level since April 2021. The encouraging trend in consumer prices will provide the Federal Reserve (Fed) some leeway to keep rates unchanged this month and if the trend continues, the Fed will likely not hike for the rest of the year.

  • Consumer prices rose 0.1% in May, pulling the annual rate of inflation down to 4.0%, the lowest annual rate since March 2021.
  • The largest contributor to the monthly increase in prices was shelter costs.
  • Energy prices were the largest negative contributor, falling 3.6% in May.
  • Prices for eating out at restaurants are still rising at a fast clip, indicating that consumer demand in that space is still strong.
  • The overall theme in recent months has been strong consumer demand for experiences over goods and we are seeing that play out in consumer pricing dynamics.

Inflation is Going in the Right Direction According to the Market

As demonstrated by the positive stock market moves in early trading today, market participants appear to believe that the latest CPI report shows inflation is heading in the right direction and may give the Fed cover to skip a June rate hike or even pause for a longer period. As shown in the chart below, headline inflation remains above the Fed’s long run target of 2%, but the month-on-month changes are well past their peak and back within the range of historic norms.

View enlarged chart

Services Aren’t Slowing Down Yet, but Goods Are Declining Gradually

The strong level of service inflation, which continues to counteract the slowing increase in good prices, is further shown in the May CPI figures. While the costs for items are falling, we expect services to remain popular for a while as consumers demand experiences over goods.

Home Costs Expected to Cool

The housing sector is currently a significant factor impacting inflation in 2023. Shelter costs, which hold a significant weight in the CPI, are expected to ease. There is evidence that rent costs will eventually decrease, as can be seen in the robust multi-family construction activity. As more projects hit the market this year due to the increase in condo and apartment building, the supply of multi-family apartments will rise, which should help bring down rent prices. As such, we don’t think it will be long before official government numbers reflect the decrease in rent prices. In the upcoming months, investors and policymakers alike should anticipate a slowing of housing-related inflation.

We have updated our Inflation Dashboard, designed to provide a snapshot of the inflationary environment, with the latest CPI data. The CPI rent of primary residence is the only one of our dashboard indicators that remains at an elevated level, and even that has fallen from an extreme level since April.

View enlarged chart


We expect that the Fed will keep interest rates where they are for the time being. The Fed may adopt a more hawkish attitude and signal an interest rate increase if any future core inflation readings come in higher than anticipated, but if the inflation trend remains the same, it seems likely the Fed will not hike rates for the rest of the year.


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