Happy Wednesday! Here’s what’s going on.
Price Hikes Ease in May, Raising Hopes in Battle on Inflation
The Consumer Price Index rose 3.3% on an annual basis in May and showed no change on a monthly basis, according to government data released Wednesday. The numbers beat analyst expectations, providing more evidence that inflation is easing its grip on the U.S. economy, albeit more slowly than most people would like to see.
The core rate of inflation, which strips volatile food and fuel prices, rose 3.4% on an annual basis — the smallest increase since April 2021. On a monthly basis, core CPI rose 0.2%.
Some of the most notable components in the price index include food, which rose just 0.1% on a monthly basis and 2.1% on an annual basis — the smallest increase since 2020. Gasoline prices fell 3.6% from month to month, and were up 2.2% over the last year. New vehicle prices fell on both a monthly (-0.5%) and annual (-0.8%) basis, while used vehicle prices dropped -9.3% relative to 12 months ago.
Still, prices are still rising for many goods and services, not least for housing. The overall shelter price index rose 5.4% on an annual basis and 0.4% on a monthly basis, providing the largest inflationary effect in the price index.
Ammunition for the Fed: Saying the report supports the argument that inflation is headed toward the Federal Reserve’s 2% target level, Moody’s Chief Economist Mark Zandi celebrated the latest numbers. “Great inflation report!” he wrote on social media. “All the trend lines look good. It is time for the Fed to cut rates.”
Philip T. Powell of the Indiana Business Research Center was similarly optimistic. “This is the best news we could’ve gotten this morning,” he told CNN. “The Federal Reserve has been watching to make sure this [monthly] number came in below 0.2%.”
Noting that a wonky measure of inflation called core ex-shelter was flat on a monthly basis, economist Paul Krugman said it may be time for the Fed to declare victory. “Inflation has basically been defeated,” he wrote.
Housing costs, though, may not be so easy to ignore, and Robert Frick, corporate economist with Navy Federal Credit Union, noted that they remain a problem. “Finally, some positive surprises as both headline and core inflation beat forecasts,” he said about the overall report, per CNBC. “There was relief at the pump, but unfortunately home and apartment costs continue to rise and remain the main cause of inflation. Until those shelter costs begin their long-awaited fall, we won’t see major drops in CPI.”
The Fed Holds Steady on Rates, Sees One Cut This Year
As expected, the Federal Reserve on Wednesday kept its key interest rate at a 23-year high in a range between 5.25% and 5.5% as it continued its effort to reduce inflation through tighter monetary conditions.
Despite the latest Consumer Price Index report showing a drop in inflation, Fed Chairman Jerome Powell said officials need to see more convincing data before changing their policy stance. “So far this year, the data have not given us that greater confidence,” he told reporters at a press conference at the conclusion of the Fed’s two-day policy meeting. “It’s probably going to take longer to get the confidence that we need to loosen policy.”
While Fed officials are still in wait-and-see mode on inflation and interest rates, they did not rule out a rate cut at some point this year, with projections indicating that one or two rate cuts could occur before the end of 2024. Seven members of the Federal Open Market Committee projected one cut this year, eight projected two and four projected none.
The FOMC will hold four more meetings this year, in July, September, November and December, and most analysts think there is little chance of a rate cut before fall.
US Healthcare Spending Is Growing Faster Than the Economy: CMS
U.S. healthcare spending grew faster than the economy overall last year and is expected to continue doing so through 2032 as it climbs to nearly one-fifth of gross domestic product, according to a report released Wednesday by actuaries at the Centers for Medicare and Medicaid Services and published in the journal Health Affairs.
Medicare’s actuaries project that U.S. health spending from 2023 through 2032 will grow 5.6% a year on average, outpacing expected nominal economic growth of 4.3% a year. As a result, healthcare spending is projected to swell from 17.3% of gross domestic product in 2022 to 19.7% in 2032.
For 2023, healthcare spending increased at a rapid 7.5% annual pace, even as the Covid pandemic subsided. That growth was faster than the 6.1% expansion of the economy overall, driving health outlays to a total of $4.8 trillion.
Insurance coverage hit a historic high: The increase reflects broad gains in insurance coverage, which is expected to have reached 93.1% in large part as the result of high pandemic-era Medicaid enrollment that is now being unwound. After reaching a record 91.2 million in 2023, Medicaid enrollment is projected to drop this year by 10.2 million (11.2%), according to the report, as states redetermine the eligibility of enrollees after the expiration of a pandemic-era prohibition against disenrollments. Overall, coverage is expected to dip — but not plummet — with enrollment gains projected for direct-purchase plans (including those through the Affordable Care Act marketplace). The share of the population with health insurance is expected to remain above 90% through 2032.
Medicare projected to have highest spending growth: Medicare spending rose by 8.4% in 2023, topping $1 trillion. It is projected to climb 6.1% in 2024. Medicaid spending, meanwhile, grew by 5.7%, compared with a 9.6% increase for 2022. And private health insurance spending is projected to have risen 11.1% last year, up from 5.9% the year before. Out-of-pocket spending rose 7.9%.
“Among the major payers, Medicare has the highest projected ten-year average spending growth rate, at 7.4 percent, whereas the growth rates for private health insurance (5.6 percent), Medicaid (5.2 percent), and out-of-pocket (4.7 percent) expenditures are projected to be comparatively lower,” the report says. “Medicare’s higher average spending growth in 2023–32 is mainly due to the program’s average projected enrollment growth rate of 2.0 percent, which reflects the enrollment of the baby-boom generation through 2029; in comparison, average projected enrollment growth is lower for private health insurance, at 0.3 percent, and it declines by 0.6 percent for Medicaid, an outcome associated with the end of the public health emergency.”
Hospital spending soars: Hospital spending is projected to have increased 10.1% last year, up from a 2.2% rise in 2022, with the change coming “in part because of increasing utilization,” according to the government actuaries. Hospital spending growth is expected to average 5.6 percent a year from 2027 to 2032.
Number of the Day: $48 Billion
The 100 largest U.S. companies, with profits of more than $1.1 trillion, would see their taxes fall by $48 billion a year under a proposal by former President Donald Trump to cut the corporate tax rate from 21% to 15%, according to a new analysis by the Center for American Progress, a left-leaning think tank. Just 10 of the companies, with profits topping $520 billion, would get an estimated annual tax cut of $23 billion.
The analysis also finds that Wall Street banks would benefit to the tune of $4.1 billion while drugmakers would reap $3.1 billion and oil giants would save $2.5 billion. “This analysis shows that the people Trump is soliciting for campaign cash would reap massive tax breaks under his corporate tax plan,” said Brendan Duke, a co-author of the analysis and senior director for economic policy at CAP Action.
Fiscal News Roundup
- Culture Wars Loom Again as House Weighs Massive Defense Policy Bill – Washington Post
- Hill GOP Leaders Eye New Tax Cuts if They Can Sweep in November – Politico
- US Inflation Cooled in May in a Sign That Price Pressures May Be Easing – Associated Press
- Fed Forecasts Just One Rate Cut This Year as Inflation Fight Grinds On – Washington Post
- Debt-Burdened Americans Find No Reprieve Even as Inflation Cools – Politico
- Treasury Says EV Tax Credit Has Saved Consumers $1 Billion – The Hill
Views and Analysis
- Disinflation Is Happening in All the Right Places – Jonathan Levin, Bloomberg
- The Economy Is Strong, but It Might Not Be Enough for Biden – Patrick T. Brown, CNN
- Trump and the GOP Are Doubling Down—Again—on Trickle-Down Economics – Thom Hartmann, New Republic
- Finally, the Senate Is Striking the Right Notes on Medicare Reimbursement – Richard Heller, The Hill
- Fighting Corporate Pricing Schemes Is Incredibly Good Politics – David Dayen, American Prospect
- New York’s Congestion-Pricing Tax Revolt – Henninger, Wall Street Journal
- Population Decline Isn’t the Problem. Hungry Kids Are – F.D. Flam, Bloomberg
- California Dabbles With Reining in Health Spending – Bernard Wolfson and McKenzie Beard, Washington Post