• Topline Consumer Price Index (CPI) undercut market expectations for May 2023
• Core CPI, less Food & Energy, stubbornly remained above expectations in May 2023
• Food Away from Home continues to outpace Food at Home price growth, reveal consumer spending demand & habits
• Shelter prices posted another large gain for May 2023, keeping pressure on household budgets despite easing in other price categories

Consumer Price Index (CPI) inflation was mixed across categories for May 2023. While the topline inflation result came in below market expectations at a 0.1% seasonally-adjusted gain for the month and +4.1% year-over-year, Core CPI prices grew at a 0.4% pace for the month which matches the pace seen for the past six months running. The 5.4% annualized pace in Core CPI, which removes the influence of food and energy price movements due to their volatile and policy-agnostic nature, remains well above the Federal Reserve’s 2.0% average inflation target. A reversal in monetary policy from the Fed will require much more progress toward the 2.0% target on Core inflation.

Price growth for household necessities remained a large influence on overall inflation in May 2023. Shelter costs, which go beyond home prices themselves, accelerated to post an 6.9% annualized pace for the month, which came in at 5.2% in April. Although homebuying activity has been depressed since early 2021, the cost of maintaining homes purchased in the fallout from the pandemic is still an ever-costlier burden on household budgets. And increases in rent costs leave nowhere to hide in terms of higher living costs. 

While inflation in Shelter costs are unavoidable, Food prices reveal that consumers are playing their own, demand-driven part in keeping inflation from reaching the Fed’s 2.0% target more rapidly. The pace of price gains for Food at Home was up on 0.1% (+0.6% annualized) for May 2023 and has been subdued since the start of 2023 – even falling outright in March and April. Food Away from Home, however, continues to respond to consumer habits of spending on dining out when the less-costly alternative of preparing meals at home is clearly available. Food Away from Home price inflation posted a 5.8% annualized growth pace for the month. Leisure & Hospitality employment gains have slowed this year and overall employment in this collection of industries remains well below pre-pandemic levels. So, wage growth pressures remain due to lack of labor supply and Food Away from Home price gains will likely be unrelenting as summer spending kicks consumer spending on recreational activities into overdrive. 

Oil prices have remained surprisingly low despite both rhetoric and action from OPEC intended to bolster price levels. This is important for consumer price inflation trends in the coming months since not only do oil prices have their impact in obvious areas such as gasoline, but also because oil price gains add upward pressure to goods through transportation and shipping costs. Given that current oil prices would only make their way to consumer price tags with a delay of several months through these channels, current trends bode well for price pressures through the remainder of the summer months. 

The 4.1% year-over-year pace of CPI growth formally fell below wage gains for the year in May 2023 (+4.3%). The U.S. labor market remains healthy and is likely feeding consumer confidence, resulting in continued demand-side pressure on inflation. PNC continues to forecast a mild recession to begin in late 2023 and run through mid-2024. Inflation’s inability to reach the Fed’s average 2.0% year-over-year target as a result of persistent consumer demand will provide cover for keeping interest rates high, which in turn will eat away at business activity and increase costs on households as they accumulate more high-interest debt in support of their spending habits. These forces will ultimately combine to force a slowdown in consumption, which is the prerequisite for any U.S. recession.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance, and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.