• Consumer prices (CPI) increased 0.4 percent in May, marking the largest 1-month increase since February 2013. On a year-over-year basis, however, prices rose 2.1 percent, just above the Federal Reserve’s 2 percent inflation target.
  • While food and energy price changes were somewhat higher, data show that price increases were broadly spread. Core inflation—a measure that excludes energy and food prices—was up by 0.3 percent on the month, its largest increase since August 2011. Year-over-year this measure rose 2.0 percent, right in line with the Fed target.
  • While the Fed does not target this specific inflation measure, the factors driving the Fed’s preferred measure are the same, suggesting that the Fed is currently meeting its target. If this trend continues, expect a gradual taper followed by moderate increases in the Federal Funds interest rate. However, if inflation continues to accelerate, the Fed may have to taper more rapidly and begin rate hikes sooner.
  • The Federal Open Market Committee (FOMC) meets today and tomorrow; a statement and press conference will follow the conclusion of the meeting. The Fed has steadily reduced the size of its asset purchases, or “tapered”, by $10 billion per meeting since it began the program in December. Analysts expect the taper to continue in tomorrow’s announcement, but a larger than expected taper could be an indication that the FOMC is wary of the potential for inflation.
  • One of the big non-energy components of the CPI, the shelter index, rose 0.3 percent for the month and 2.9 percent for the year. This has a large effect on the overall index because shelter is a little more than 30 percent of the index.
  • Rent of primary residences—actual market rents paid by individuals who do not own the home they live in (pictured below)—rose 3.1 percent for the year ending in May 2014. When rents are rising, it becomes more attractive to own a home. Because the bulk of home ownership costs for someone with a 30-year fixed rate mortgage are fixed, even if rents are initially cheaper, potential buyers can expect rent costs to catch up to ownership costs.
  • A few other sub-components of the shelter index show interesting trends. Housing at School, excluding board (pictured below) shows a gradual decline, but this is just a decline in the rate of increase. In fact, for the year ending May 2014, the price of housing at school was still rising at a 3.2 percent rate—faster than that for rent of primary residences. In contrast, Other Lodging Away from Home Including Hotels/Motels (pictured below) shows a sharp uptick after some previous stability—a 5.2 percent gain for the year ending in May 2014. While the trend for hotel/motel pricing is more variable, it has seen smaller price gains than housing at school over the last 6 years with only a few exceptions—this month being one.

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