Kiplinger's Economic Outlooks are written by the staff of our weekly Kiplinger Letter and are unavailable elsewhere. Click here for a free issue of The Kiplinger Letter or to subscribe for the latest trends and forecasts from our highly experienced Kiplinger Letter team.
Headline inflation remained moderate in May at 2.4%. Core inflation (prices excluding food and energy) stayed at 2.8% for the third month. Cost increases in non-energy services slowed a bit to 0.2% as both housing and health care price increases moderated.
Also helping out was a 1.0% decline in energy costs, and modest dips in new and used vehicle prices. This last is unlikely to continue, however, because of tariffs on car imports.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The price of groceries rose modestly, on average, helped by a continued decline in egg prices (down 2.7%). The avian flu had severely reduced flocks at egg-laying chicken farms, but farmers may have turned a corner. Prices are still 41.5% higher than a year ago, however. The cost of dining out continued to rise at a moderate pace.
Tariff effects on prices so far appear to be limited to toys (up 1.3%) in May. However, more effects should filter in gradually, as a number of businesses are able to first dig into existing inventories, or absorb tariff costs for the moment before passing on price increases to their customers.
The 25% duties on imported cars and auto parts will eventually raise both the average prices of new and used vehicles, and the cost of vehicle repair and insurance. Despite the imminent U.S.-China trade pact, the remaining 30% tariff on China and 10% tariff on most other countries will affect prices of clothing, electronics and many other goods.
May's moderate inflation will please the Federal Reserve but is unlikely to give the central bank enough reason to cut interest rates when the Fed meets on June 18. The Fed will want to see the effects of tariffs on inflation over the next several months before acting. Since tariff effects on consumer prices will happen only gradually, the Fed is likely to be on hold for a number of months in order for it to be able to assess the impact.
While the headlines focus on the Consumer Price Index, note that the Fed's goal of 2% inflation is based on a measure called the personal consumption expenditures deflator, not the CPI. The PCE deflator excluding food and energy rose at a 2.5% rate for the 12 months ending in April, compared with the core CPI’s 2.8% March number. But that is still too high for the Federal Reserve's 2% target.
Related content
-
Who Will Replace Jerome Powell as Fed Chair?Even if President Trump doesn't make good on threats to fire Chair Powell, the Fed leader's term ends in 2026.
-
June Fed Meeting: Updates and CommentaryThe June Fed meeting was a key economic event, with Wall Street keyed into what Fed Chair Powell & Co. have to say about interest rates and the economy.
-
America's Surprising Strengths in Manufacturing and ExportsThe Kiplinger Letter Despite common perceptions that the U.S. doesn't build things anymore, American factories are still hard at work. A special report from The Kiplinger Letter.
-
Will State Laws Hurt AI’s Future?The Kiplinger Letter Republicans in Congress are considering a moratorium on state AI laws. But it’s likely a growing patchwork of state AI regulations will be here for a while.
-
AI Goes To SchoolThe Kiplinger Letter Artificial intelligence is rapidly heading to K-12 classrooms nationwide. Expect tech companies to cash in on the fast-emerging trend.
-
The New AI Agents Will Tackle Your To-Do ListThe Kiplinger Letter Autonomous AI agents “see” your computer screen, then complete a task, from buying a concert ticket to organizing email. This opens up a world of possibilities.
-
Trump's Second 100 DaysThe Kiplinger Letter President Trump's agenda faces legal and legislative roadblocks.
-
May Fed Meeting: Updates and CommentaryThe May Fed meeting came and went with little fanfare as Fed Chair Powell & Co. stuck to their data-dependent script toward interest rates amid tariff uncertainty. The May Fed meeting came and went with little fanfare as Fed Chair Powell & Co. stuck to their data-dependent script toward interest rates amid tariff uncertainty.
