Inflation hit its highest level since April 2023 in May, at 4.2%, according to new data from the Bureau of Labor Statistics on Wednesday, as new vehicle sales began to rebound despite higher interest rates and prices.
Driving the news: Inflation continues to rise again, jumping from 3.9% in April to 4.2% in May.
The rise from 2.4% in February is primarily attributed to the surge in energy costs since the start of the conflict in the Middle East.
Gasoline prices increased 8.6% in May.
The index for gas is up 40.5% on an annual basis.
Gas prices have retreated from their high point of $4.52 per gallon to $4.15, according to AAA.
Housing and food prices also saw modest gains in May.
Impact on rates: The inflation news arrives a week ahead of the Federal Open Market Committee’s first meeting with new Federal Reserve Chairman Kevin Warsh.
After seeing inflation rise and last week’s strong labor report showing 172,000 jobs added in May and unemployment not moving at 4.3%, Cox Automotive Chief Economist Jeremy Robb is not expecting interest rate cuts on the horizon, with inflation remaining high throughout the summer due to higher gas prices.
“While the number came in as expected, it’s still the highest reading in almost three years. It would seem like Kevin Warsh and the Fed would have a harder time arguing for rate cuts based on the data. And certainly with the stronger jobs report last week, it's just another data point not going in the right direction for market participants looking for interest rate cuts.”
Jeremy Robb
Cox Automotive
How the car market is faring: New vehicle sales picked up in May, with several OEMs reporting strong results. Cox Automotive’s seasonally adjusted annual rate was 16.1 million. That’s against a backdrop of high rates, 9.87% (Dealertrack), and prices nearing $50,000.
“The new vehicle market has likely been driven a bit more by better stock market valuations, with markets hitting new highs several times in May,” Robb said. “The wealth effect of stock market gains also likely helped new vehicle sales, and we did see incentives rise a bit too, which are always somewhat helpful.”
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Takeaway for dealers: The ongoing inflation and higher gas prices could impact the overall market moving forward and dent hopes of some consumers looking for rates to drop.
“How long can that last if it's driven by stock market gains? No one knows, but I do think it matters, especially as affordability overall remains a higher concern with inflation readings hitting three-year highs and real wage growth now declining,” Robb said. “Inflation growth outpacing wage growth will take a toll on consumers.”
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