June 16, 2011 - The Federal Reserve is unlikely to alter its current accommodative monetary policy despite May’s surge in core inflation, the strongest increase in nearly three years, said NAFCU Staff Economist Katrin O’Connor Wednesday.
The core inflation increase was a key factor behind May’s slightly higher-than-expected 0.2 percent, seasonally adjusted, increase in the overall consumer price index. O’Connor noted that the core inflation data were partly due to temporary factors such as higher vehicle prices. “The uptick in vehicle prices arose from supply shortages as well as higher production costs,” she said.
Energy prices fell 1 percent in May, following a 2.2 percent increase in April. At the same time, gas prices dropped 2 percent in May, following a 3.3 percent increase in April, the first time since last June that the gas index decreased. Food prices were up 0.4 percent in May.
On a year-over-year basis, overall CPI growth picked up from the 3.2 percent pace in April to 3.6 percent in May, the highest level since October 2008. From a year ago, energy prices were up 21.5 percent, gas prices were up 36.9 percent and food prices increased by 3.5 percent.
Core prices, which exclude food and energy costs, rose 0.3 percent in May, up from the 0.2 percent pace reported in the previous month. Over the past 12 months, core CPI growth picked up from the 1.3 percent pace in April to 1.5 percent in May, the highest level since January 2010.
An additional factor not to be overlooked in May’s CPI report is that consumer spending has recently slowed, making it harder for companies to pass on price increases to consumers, O’Connor said. “Furthermore, gas prices and food prices are expected to further moderate in the coming months, keeping overall inflation in check,” she said. “This, in combination with improvements in the labor market, will likely support spending growth during the second half of the year.”
The economist added that even with May’s core inflation surge, the Fed still has plenty of flexibility to maintain its current monetary policy.