On the Dash:
- Inflation hit 4.2% in May, its highest level in three years, driven by energy costs.
- Falling new-vehicle prices reflect weakening demand, not improved affordability for car buyers.
- Rate cuts are increasingly unlikely, keeping monthly payments out of reach for many buyers.
Inflation climbed to 4.2% in May, its highest reading since early 2023, the Bureau of Labor Statistics reported Wednesday. The increase adds pressure to an auto market already struggling with affordability, making near-term rate cuts increasingly unlikely.
Core inflation, which excludes food and energy, rose 2.9% over the past year. Shelter costs rose 3.4% over the year, and five-year inflation expectations reached 3.9% in May, well above pre-pandemic baselines, according to the Washington Post.
Consumers are experiencing the largest rises in energy costs, with the energy index accounting for over 60% of the monthly all-items increase. Additionally, the gasoline index increased by 7% during the month and has risen 40.5% over the past year.
However, new vehicles were among the indexes that decreased in May, falling 0.3%, though year-over-year new vehicle prices are up just 0.2%. For dealers, those numbers signal softening demand rather than a healthy market correction.
The Washington Post reported that rising gas prices tied to the conflict in Iran are the main force behind the numbers. That marks the third consecutive month the war has pushed consumer prices measurably higher.
CBT News reported in April that NADA Chief Economist Patrick Manzi warned a prolonged conflict could disrupt supply chains, tighten credit conditions, and weigh on consumer confidence. As the war with Iran nears the four-month mark, those conditions are now materializing.
The White House has characterized the surge as a temporary disruption tied to the conflict, but no resolution is in sight. During a signing ceremony in the Oval Office on Wednesday, Trump was asked by a reporter if he was concerned by the new inflation report. “No, I love it. The numbers are great,” Trump responded, adding, “I love the inflation.”
However, economists expect inflation to continue climbing toward 4.5% as elevated energy, transportation, food, and fertilizer costs work further through the economy, according to the Post.
