Inflation topped 4% in May, but the worst may be over

By Elisabeth Buchwald, CNN

(CNN) — High gas prices pushed annual inflation to the highest level in three years, according to May data released by the Commerce Department on Thursday.

The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures price index, rose to 4.1% in May from 3.8% in April. On a monthly basis it was unchanged at 0.4%.

But when stripping out gas and food prices, two of the most volatile components tracked, so-called core inflation rose at a much more muted annual rate of 3.4% from 3.3% in April.

The inflation readings were mostly in line with economists’ expectations, according to FactSet consensus estimates.

Thursday’s data comes at a pivotal time for Fed policymakers, who have signaled patience on rate cuts amid lingering concerns about sticky inflation. Financial markets are currently pricing in the possibility of rate hikes later this year. President Donald Trump has repeatedly pushed for the central bank to cut rates — and recently appointed a new Fed chairman who is more aligned with his thinking — but stronger-than-expected inflation readings push the timeline for such a move further out.

Meanwhile, spending and income rose faster than economists anticipated last month.

Disposable income rose to 0.7% in April, however, that’s before adjusting for inflation. But even when adjusting for inflation, disposable incomes rose 0.3% in April.

Spending also rose by 0.3%.

Another positive development: personal savings ticked up slightly in May after dwindling for months as consumers spent more on gas.

In a separate report from the Commerce Department, US gross domestic product, which measures all the goods and services produced in the economy, was revised higher to 2.1% from 1.6% in the third estimate. The upward revision can be attributed to a downward revision on imports, which subtracts from GDP.

All eyes on Hormuz

Now that oil tankers are passing through the Strait of Hormuz after months of being stalled, gas prices are starting to come down. In turn, that’s helping to alleviate inflationary concerns and pressure on the Fed to act sooner.

But upcoming months’ data will be the ultimate test to see if indeed lower gas prices, assuming they continue to decline, translate to slower inflation.

Part of the problem is that the inflation Americans are experiencing stems from more than just gas, Heather Long, chief economist at Navy Federal Credit Union, said in a note Thursday.

“Housing, medical care and electricity are also putting pressure on family budgets and overall inflation,” she said, adding that she expects the central bank to hike rates twice this year.

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