The CPI's turn

Both the PCEPI and the CPI are stabilizing

The Consumer Price Index inflation reading for May, published two days ago, showed prices increased on average by about only about 1 percent (on an annualized basis). That was the case for the “all items” index; the “core” CPI (the index that excludes food and energy) increased by about 1.6 percent (annualized) over the month of May.

In conjunction with what we learned from the last PCEPI inflation reading (for April), the CPI offers further support to the notion that inflation is cooling, or “disinflating.”

Figure 1 displays the CPI rate of inflation measured for both the all-items index and for the core index, at the monthly frequency since January 2024 (the monthly percent changes are annualized).

Over the first five months of 2025, both CPI indexes are averaging lower rates of change than for the 12 months of 2024. For this year, too, there has been a noticeable drop-off after January. The Core-CPI inflation average from February through May has equaled 1.9 percent; for the All-items, the rate has averaged 1.4 percent.

These trends are important for many reasons, not least of which, the Federal Reserve’s policy committee, the FOMC, is meeting next week. Once again we face the “will they or won’t they” question on interest rates.

The past few months inflation has been hovering right around the Fed’s preferred 2 percent mark. That does not automatically imply, of course, the Fed will cut rates. But, in the least, inflation is doing its part.