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Inflation remained the dominant economic story this week as higher energy costs continued to work their way through the economy. At the same time, housing activity showed signs of improvement, while trade and inventory data provided a mixed picture of underlying demand.
Inflation Pressures Continue to Build
Higher fuel costs remained a key driver of inflation in May, affecting both consumers and businesses. Consumer inflation reached its highest annual rate in more than three years, while transportation-related pricing continued to move higher.
Key developments:
- Consumer Price Index increased 0.5% month over month.
- Annual CPI rose 4.2%, the strongest increase since April 2023.
- Core inflation (excluding food and energy) increased 2.9% year over year.
- Airline fares were among the categories influenced by higher fuel costs.
Inflation also appears to be affecting how other economic indicators are interpreted, particularly trade data, where nominal growth looks stronger than inflation-adjusted results.
Housing Market Activity Improves
The housing sector delivered one of the more positive economic developments of the week. Existing-home sales increased for a second consecutive month, while available inventory continued to rise.
Notable housing trends:
- Existing single-family home sales rose 3.5% from April.
- Sales were 3.3% higher than a year ago.
- Inventory reached its highest level since November 2019.
- Homes available for sale have increased for five consecutive months.
Mortgage rates, however, remain elevated. The average 30-year fixed mortgage rate rose to 6.52%, near its highest level since last summer.
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Trade Growth Looks Softer After Inflation Adjustment
Trade activity appeared considerably weaker once inflation adjustments were applied to the data. While exports and imports both increased in nominal terms during April, real growth was much more limited.
Highlights from April trade data:
- Real exports increased just 0.7%.
- Real imports declined 0.1%.
- Capital goods led growth in both exports and imports.
- Computers, semiconductors, telecommunications equipment, and aircraft were among the strongest categories.
The data suggests that inflation continues to play a significant role in headline trade figures.
Inventories Remain Lean
Wholesale sales continued to outpace inventory growth in April, resulting in one of the leanest inventory environments in more than a decade.
Key inventory observations:
- Wholesale inventories-to-sales ratio fell to its lowest level since 2013.
- Excluding petroleum products, inventories were the leanest since July 2021.
- Durable goods sales were supported by electrical goods, metals, and computer equipment.
- Petroleum products and chemicals contributed to growth in nondurable goods sales.
Energy Prices Begin to Ease
After a sharp run-up earlier this year, fuel prices moved lower again during the latest week. Diesel prices declined for a second consecutive week, while crude oil prices softened amid expectations that tensions involving Iran could move toward resolution.
Energy market developments:
- National average diesel prices fell 14 cents per gallon.
- Diesel prices have declined 43 cents over the past five weeks.
- West Texas Intermediate crude closed below $88 per barrel.
- Crude prices moved lower on expectations of progress in U.S.-Iran negotiations.
What to Watch
This week's economic data highlighted three themes: persistent inflation pressures driven by energy costs, improving housing market activity supported by growing inventory, and softer trade growth once inflation is removed from the equation. At the same time, wholesale inventories remain lean and fuel prices have begun to retreat from recent highs.
