Key takeaways

  • The Consumer Price Index remains above 3%, reflecting inflation’s stubborn persistence.

  • Inflation has been 3% or higher for more than three years.

  • Sticky inflation will likely mean the Federal Reserve only cuts interest rates —at most – once this year.

For the 12th consecutive month, the one-year change to the cost of living for May, as measured by the Consumer Price Index (CPI), remains above 3%. However, inflation’s direction may be encouraging in that CPI declined, albeit modestly, to 3.3%. That represents the second consecutive month of decline.1 Nevertheless, on the same day the latest CPI was released, the Federal Reserve (Fed) indicated it remains concerned about inflation’s persistence.

The Fed’s primary approach to reducing inflation was a series of 11 interest rate hikes implemented between March 2022 and July 2023. The Fed's actions appeared to have the desired impact, as inflation slowed considerably. That prompted the Fed to raise the possibility of rate cuts in 2024. However, the Fed made clear in June 2024 that rate cuts are not on the immediate horizon.

Chart depicts inflation trendline March 2021 – May 2024.
Source: U.S. Bureau of Labor Statistics, U.S. Bank Asset Management Group, May 2024.

“What we continue to see is that the Fed will hold interest rates higher for longer,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. After the latest meeting of the policymaking Federal Open Market Committee (FOMC) ended on June 12, 2024, Fed chair Jerome Powell seemed to confirm this. “We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%,” said Powell. “So far this year, the data have not given us that greater confidence.”2

Markets early in the year anticipated a number of interest rate cuts by the Fed over the course of the year. After its June meeting, FOMC members signaled that only one rate cut may occur before 2024’s close.


Inflation’s recent history

Over the past thirty years, living costs as measured CPI have grown by an average of 2.6% per calendar year. From 2000 through 2020, inflation never exceeded 4%, and in the previous decade (prior to 2021), living costs grew at a rate of 2% or less in most years. That changed in 2021, as inflation surged and Americans had to adjust to a different environment. In 2023, inflation began to return to what are more historically typical levels.3 The Federal Reserve Statement on Longer Run Goals articulates a long-term inflation target of 2%, as measured by the annual change in the personal consumption expenditure (PCE) price index.4

Inflation trends as measured by the Consumer Price Index 2000 - May 2024.
Source: U.S. Bureau of Labor Statistics, U.S. Bank Asset Management Group, May 2024.

While higher costs for food and energy drove inflation’s surge in 2021 and 2022, those trends changed considerably in recent months, contributing to inflation’s slowdown. For the 12 months ending in May 2024, food costs rose just 2.1% while energy costs were up 3.7%, though energy costs declined in May. However, rising shelter costs are among the biggest contributors to persistent inflation. For the 12-month period, shelter costs are up 5.4%, with overall services costs (less energy services) up 5.3% over that period.1 “Some of the ongoing inflationary pressure comes from continued healthy wage gains for workers,” says Haworth, “The strong labor market is certainly contributing to the economy's strength and inflation’s persistence.”

As the inflation environment evolves, investors may be asking:

  • When will inflation drop to the Fed’s 2% target?
  • Are there risks that inflation could trend higher again?
  • How should I position my investments given current inflation dynamics?


Looking beyond the headline numbers

Inflation is one primary Fed focus. As the country’s central bank, the Fed’s mandate is to promote full employment, stable prices and moderate long-term interest rates. In determining interest rate policy, an important measure the Fed monitors is “core” inflation (excluding the volatile food and energy sectors). In May 2024, core inflation rose 3.4% for the previous 12-month period, its lowest level in more than three years, representing a modest drop from April’s 3.6% reading.1 Core inflation remains well above the Fed’s 2% annual target.

Chart depicts trailing 12-month Core Consumer Price Index (CPI), a measure of inflation, 2021 - May 2024.
Source: U.S. Bureau of Labor Statistics, U.S. Bank Asset Management Group, May 2024.

“Core inflation remaining higher is another sign that the Fed is likely to push interest rate cuts farther into the future,” says Haworth. Contributing to the expectation of rate cut delays was May’s Producer Price Index (PPI) report, measuring wholesale costs for raw, intermediate and finished goods. PPI for the 12 months ending in May rose 2.2%, comparable to April’s report, which represented PPI’s highest reading in a year. Although May data showed an actual decline in PPI for the month, the long-term decline is still happening less quickly than many would like.5

The Fed’s preferred inflation gauge, the PCE price index, is a measure of the spending on goods and services. This again offered little encouragement for investors eager for the Fed to begin cutting rates. The headline PCE index held steady at 2.7% for the one-year period ending in April 2024. The narrower “core” PCE (excluding the volatile food and energy categories) rose 2.8% over the same period, the third consecutive month the core PCE held at that level.6 Again, both numbers are well above the Fed’s long-term 2% target.

“To this point, the Fed remains firm that it wants to see inflation down to its 2% target,” says Eric Freedman, chief investment officer at U.S. Bank Wealth Management.

“To this point, the Fed remains firm that it wants to see inflation down to its 2% target,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. Freedman says inflation’s “stickiness” makes the Fed somewhat cautious about when it begins cutting interest rates. Given inflation’s persistence in the 3% range and an economy that has proved resilient despite higher interest rates, “There’s enough cover right now for the Fed to sit tight,” says Freedman.

The fed funds target rate, managed by the Fed’s policy-making Federal Open Market Committee (FOMC), is 5.25% to 5.50%, up from close to 0% as recently as early 2022. The Fed has maintained the target rate at that level since July 2023. In that time, bond yields rose commensurately across the board. The benchmark 10-year U.S. Treasury note stood at 4.98% on October 18, then fell below 4% in late December as investors began to anticipate Fed rate cuts. However, 10-year Treasury yields have, in 2024, remained firmly above 4%. “The markets initially anticipated an early start to Fed rate cuts in 2024,” says Haworth. The Fed has made clear that an interest rate cut currently on hold. “Nevertheless, markets appear to believe that the Fed is on track to temper inflation, even if it takes a little longer than initially expected,” says Haworth.


How inflation can impact your portfolio

At a time when inflation began to slow from its peak in mid-2022, stocks performed better. In early 2024, the S&P 500 stock index reached new highs. While bond yields are below peak levels reached in October 2023, the bond market continues to offer attractive yields for long-term investors. Although yields on some shorter-term securities exceed yields of some longer-term bonds, Haworth says investors should consider placing more emphasis on their ultimate portfolio goals. “It may be an appropriate time to move money out of short-term vehicles and focus on positioning your portfolio in assets, such as stocks and longer-term bonds, that can help you achieve your ultimate financial objectives in the years to come.”

“We may not yet be seeing the massive disinflationary environment many are looking for,” says Freedman, “but’s it’s still an environment where we think you can own stocks, as opposed to getting more bearish.”

Haworth notes that the stock market has been on an upswing since late 2022. “In general, stock markets can perform well in either a high or low-rate environment, but it is periods of transition from one environment to the next that can cause more significant price swings.”

Haworth says the persistent inflationary environment creates some challenges for bond investors. As a result, U.S. Bank’s Asset Management Group currently recommends investors tilt portfolios toward equities and real assets and away from traditional fixed income.

Generally, a consistent long-term strategy tends to work to the benefit of most investors. This likely precludes any dramatic changes to your asset allocation strategy in response to persistently elevated inflation.

Be sure to talk with your financial professional about what steps may be most appropriate for your situation.

Frequently asked questions

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  1. U.S. Bureau of Labor Statistics, “Consumer Price Index Summary, May 2024,” June 12, 2024.

  2. Board of Governors of the Federal Reserve, “Chair Powell’s Press Conference,” June 12, 2024.

  3. Source: U.S. Bureau of Labor Statistics.

  4. Board of Governors of the Federal Reserve System, “2020 Statement on Longer-Run Goals and Monetary Policy Strategy,” Aug. 27, 2020.

  5. U.S. Bureau of Labor Statistics, “Producer Price Index News Release summary, May 2024,” May 13, 2024.

  6. U.S. Bureau of Economic Analysis, “Personal Income and Outlays, April 2024,” May 31, 2024.

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