• Inflation pulled back in May 2024. The consumer price index declined to a 3.3% annual rate, down from 3.4% in April.
• Prices have eased for consumer staples such as gasoline and groceries. Housing inflation has been stubbornly high, though it's falling slowly.
• The CPI data is likely welcome news for Federal Reserve officials, who may see it as evidence they can soon cut interest rates.

Inflation fell slightly in May, as positive trends such as lower gasoline prices were counteracted by others including stubbornly high costs for housing.

Trends under the surface suggest the fight against inflation continues to bear fruit, albeit slowly, economists said.

The consumer price index, a key inflation gauge, rose 3.3% in May from a year ago, the U.S. Labor Department reported Wednesday. That's down from 3.4% in April.

"I think this report reinforces the disinflationary narrative, that inflation is almost back in the bottle," said Mark Zandi, chief economist at Moody's Analytics.

'Encouraging' news for interest rates

The CPI gauges how fast prices are changing across the U.S. economy. It measures everything from fruits and vegetables to haircuts, concert tickets and household appliances.

The April inflation reading is down significantly from its 9.1% pandemic-era peak in 2022, which was the highest level since 1981. However, it remains above policymakers' long-term target, around 2%.

The Federal Reserve uses inflation data to guide its interest rate policy. Economists expect the central bank to leave borrowing costs unchanged — at a roughly two-decade high — at the conclusion of its latest policy meeting later Wednesday.

However, the newest batch of inflation data supports the notion of an interest-rate cut in coming months, assuming the trajectory doesn't change, economists said.

"We still need several more months of this, but the fundamentals are encouraging," Paul Ashworth, chief North America economist at Capital Economics, wrote in a note Wednesday.

Food and gasoline inflation fell

While annual data on inflation trends is helpful, economists generally recommend looking at monthly numbers as a better guide of short-term movements and inflation trends.

The monthly reading was unchanged, at 0% in May, down from 0.3% in April and 0.4% in March. To get back to target, economists say the monthly reading should consistently be in the range of about 0.2%.

That downward move was "largely driven" by lower gasoline prices, said Joe Seydl, senior markets economist at J.P. Morgan Private Bank.

U.S. gasoline prices fell 3.6% in the month from April to May, after having increased in each of the prior three months, according to CPI data. Prices are up about 2% over the past year.

Consumers paid an average pump price of roughly $3.58 a gallon at the end of May, according to weekly data published by the U.S. Energy Information Administration.

Gas prices have continued to decline since then: Average prices were $3.43 a gallon as of June 10.

There has also been a broad pullback in grocery prices.

Monthly "food at home" inflation has been at 0% or even negative for the past four months, according to CPI data.

"Food inflation has fallen back really sharply," said Olivia Cross, a North America economist at Capital Economics.

That's largely due to falling prices for agricultural commodities, in addition to others such as easing pressures in the labor market, she said.

Housing inflation is falling slowly

Economists also generally like to consider an inflation measure that strips out energy and food prices, which can be volatile, to determine prevailing inflation trends.

That reading, known as "core" CPI, fell to a monthly 0.2% reading in May, down from 0.3% in April, and 3.4% on an annual basis, down from 3.6%.

Some components of core CPI remain trouble spots. Chief among them is housing, which has remained stubbornly elevated, economists said.

Shelter inflation was 5.4% annually in May, down marginally from 5.5% in April.

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Shelter inflation has an outsized impact on CPI numbers because it's by far consumers' largest expenditure.

"It's falling more slowly than people were hoping for," said Michael Pugliese, a senior economist at Wells Fargo Economics. "It moves at a glacial pace both up and down."

Prices for household necessities 'going nowhere fast'

That said, housing inflation is falling. It's down from a peak over 8% in March 2023.

Economists expect it to continue to decline given prevailing real estate trends, but say it will likely take a while for that cycle to play out.

For example, market rents for new leases are flat and "haven't gone anywhere for two years," Zandi said.

"Basic [household] necessities — food, gas, rent — they're all going nowhere fast, and that's really very encouraging," Zandi added.

Aside from housing, other categories with "notable increases" over the last year include motor vehicle insurance, up 20.3%; medical care, up 3.1%: recreation, up 1.3%; and personal care, up 2.9%, the Bureau of Labor Statistics said.

Meanwhile, some categories have seen prices pull back. Broadly, physical goods prices excluding food and energy commodities declined by 1.7% in the past year, including a 9.3% reduction for used cars and trucks; airline fares are also down, by 5.9%.

Services inflation has been 'slower moving'

Inflation for physical goods spiked as the U.S. economy reopened in 2021. The Covid-19 pandemic disrupted supply chains, while Americans spent more on their homes and less on services such as dining out and entertainment.

Now, "the goods side of the inflation story is pretty much back to normal," Pugliese said. "It's really the services side that's been much slower moving."

There are many reasons for that, economists said.

For example, a surge in new and used car prices a few years ago is likely now fueling high inflation for motor vehicle insurance and repair, since it generally costs more to insure and repair pricier cars, economists said.

The services sector is also generally more sensitive to inflationary pressures in the labor market such as strong wage growth.

Record-high demand for workers as the pandemic-era economy reopened pushed wage growth to its highest level in decades. The labor market has since cooled and wage growth has declined, though it remains above its pre-pandemic level.

Average hourly earnings for private-sector workers grew at a 4.1% annual pace in May, down from a peak near 6% in March 2022.

"From a wage inflation perspective, we're still too high," J.P. Morgan's Seydl said.

However, data suggests wages will continue to cool from here, he added.