Year-over-year inflation declined again in May, with headline inflation down to 4% from a year ago. More decline is ahead when used-car prices and rents finally accurately reflect what has already happened.
With inflation continuing to decline and lagged impacts still coming from the monetary tightening over the last 15 months, the Federal Reserve left the Federal Funds Rate unchanged last week.
The initial retail sales report for May was a mixed report with downward revisions to March but stronger than expected growth in May. Category-level performance was again mixed in May, but more major categories were up than down. Consumers are still spending.
The labor market is not as strong as a year ago, but continuing claims continue to be lower than before the pandemic began.
Consumer sentiment is increasing in June as worry about the debt ceiling is behind us, and consumers are feeling better about the future.
Inflation Fell Again, With More Declines Expected
Year-over-year inflation, according to the Consumer Price Index (CPI), declined again in May. The headline aggregate measure increased 0.1% on a seasonally adjusted basis, which was a deceleration from April. The core CPI, which excludes Food and Energy, rose 0.4%, which was the same rate of increase as in April.
Most major categories saw decelerating increases, but transportation, education and communication saw declines. Transportation’s decrease was caused entirely by declines in motor fuel.
Used cars again saw a large increase that was responsible for much of the core price increase, but the increase measured in May was inconsistent with declines Cox Automotive has observed in both wholesale and retail used prices in May. New-vehicle prices saw a small decrease, which is more consistent with what the Kelley Blue book team measured in real transactions in May as incentives and discounting grew.
Shelter inflation is still high and contributes much of the above-target inflation. Even without the CPI not yet seeing measurable rent declines, lower-income consumers are seeing accelerating relief from an extreme amount of inflation.
On a year-over-year basis, core CPI declined to a 5.3% increase from 5.5%. The overall CPI year-to-year declined to 4.0% from 4.9% previously. Our estimated CPI for the lowest income quintile declined to 9.8% in May from 11.9% in April and a peak of 21.9% last June.
The Federal Reserve Left Funds Rate Unchanged
With inflation continuing to decline and lagged impacts still to come from the monetary tightening that has occurred over the last 15 months, the Federal Reserve left the Federal Funds Rate unchanged last week.
The Fed was still hawkish in its outlook by communicating the likelihood of two more quarter-point rate increases in future meetings this year with inflation still high.
Consumers Keep Spending, Though on What Varies
The initial retail sales report for May was a mixed report with downward revisions to March but stronger than expected growth in May. Even with the stronger-than-expected growth, the 0.3% increase was a deceleration from the 0.4% increase in April.
The auto sector outperformed the overall retail market as sales excluding motor vehicles and parts increased by 0.1%, while sales of motor vehicles and parts increased by 1.5%.
Category-level performance was again mixed in May, but more major categories were up than down. Building material and garden equipment and supplies stores (+2.2%) and motor vehicle and parts dealers had the largest gains. Gas stations (-2.6%) and miscellaneous stores (-1.0%) had the largest declines.
Retail sales were up 1.6% year-over-year on a nominal basis, up from 1.2% in April. Compared with last year, a third of the major categories are down, with gas stations (-20.5%) and furniture, home furnishing, electronics, and appliances (-5.8%) down the most.
Motor vehicles and parts were up 4.4% from a year ago, while food services and drinking places (+8.0%) was the category up the most.
Adjusted for inflation using the CPI, retail sales increased 0.2% for the month but were down 2.4% year-over-year.
Initial Jobless Claims Hold Steady at More Elevated Levels
Seasonally adjusted initial jobless claims were unchanged at 262,000 for the week ending June 10. That was the highest level since October 2021 and 48,000 more than in 2020 before the pandemic began. Non-seasonally adjusted initial claims increased by 29,000 but were 4,000 lower than before the pandemic. Continuing claims, representing people who previously filed and remain on traditional unemployment compensation, increased by 58,000 from the previous week, moving the total up to 1.78 million as of June 3. That level of continuing claims was 112,000 lower than before the pandemic.
The broadest measure of continuing claims declined by 16,000 to 1.62 million in the latest data, which lags the traditional number and is not seasonally adjusted. That total measure is down 67,000 over the last four weeks and 484,000 lower than before the pandemic.
Consumer Sentiment Improves on Debt Ceiling Settlement
The initial June reading on Consumer Sentiment from the University of Michigan increased 7.9% to 63.9 as views of current conditions and future expectations both increased.
The median expected inflation rate over the next year declined to 3.3% from 4.2% last month, and the longer-term view declined to 3.0%. Consumers’ views of vehicle buying conditions improved to the best level since February and were much better than a year ago. Consumers saw improvement in prices and interest rates but still viewed both negatively.
The daily index of consumer sentiment from Morning Consult has increased by 1.9% so far in June. The view of the future was the highest since December 2021.
Jonathan Smoke leads Cox Automotive’s economic and industry insights team, which tracks key metrics and trends impacting both the wholesale and retail markets for vehicles informed by the proprietary data from the company’s businesses and platforms. For 28 years, Smoke has focused on translating data and trends into relevant actionable insights for the industries that represent the biggest purchases that consumers make in their lifetimes: real estate and automotive. Smoke joined Cox Automotive in 2017.