Inflation cooled in May to its lowest annual level in more than two years, likely easing pressure on the Federal Reserve to raise interest rates further, the Labor Department reported on Tuesday.
The consumer price index, which measures changes in a wide range of goods and services, rose just 0.1% for the month, taking the annual figure down to 4% from 4.9% in April. That 12-month increase was the smallest since March 2021, when inflation was just beginning to rise, reaching a 41-year high.
Without the volatile food and energy prices, the picture was not so optimistic.
So-called core inflation rose 0.4%m/m and was still 5.3% higher than a year ago, suggesting that while price pressures have eased somewhat, consumers are still under fire.
All of these numbers were right in line with Dow Jones consensus estimates.
A 3.6% fall in energy prices helped keep CPI growth in check this month. Food prices increased by just 0.2%.
However, a 0.6% increase in emergency accommodation prices was the main contributor to the rise in headline CPI. Housing-related costs make up about a third of the index weighting.
Elsewhere, used car prices rose 4.4%, unchanged from April, while transportation services rose 0.8%.
Markets reacted little to the release, although it is expected to play a major role in the decision the Federal Reserve will make on interest rates at its meeting this week. Stock market futures were slightly positive, although government bond yields fell sharply.
The Fed fund market saw sharp price moves, with traders pricing in a 93% chance the Fed will not hike interest rates when its Wednesday meeting concludes.
“The encouraging trend in consumer prices will give the Fed some leeway to keep rates on hold this month, and if the trend continues the Fed is unlikely to hike rates for the rest of the year,” said Jeffrey Roach, chief economist at LPL Financial.
The weak CPI reading was good news for workers. The inflation-adjusted average hourly wage increased 0.3% month-on-month, the Bureau of Labor Statistics said in a separate news release. On an annual basis, real wages have risen by 0.2% after being in negative territory for most of the inflationary spurt that started about two years ago.
The CPI report showed a growing discrepancy between core and headline numbers. The headline index is usually ahead of the index excluding food and energy, but that hasn’t been the case lately.
The year-over-year discrepancy between the two gauges is due to the fact that gas prices were rising sharply at this point in 2022. Eventually, prices at the pump would surpass $5 a gallon, something that had never happened in the US before. Gasoline prices fell by 19.7%. last year, as Tuesday’s BLS report showed.
However, food prices are still up 6.7% yoy, although egg prices fell 13.8% in May and are now slightly in negative territory on a 12-month basis after rising sharply in previous months. Emergency housing prices increased by 8% and transport services by 10.2%. Airfares were also down, falling 13.4% year-on-year.