The US Labor Department reported on Tuesday that inflation fell to its slowest annual rate in more than two years in May, potentially reducing pressure on the Federal Reserve to keep raising interest rates.
The consumer price index, which measures changes in a wide range of goods and services, rose just 0.1% in April, slowing to a 4% annual rate from 4.9% in April. The 12-month increase was the smallest since March 2021, when Inflation was just starting to rise to its highest level in 41 years. Excluding volatile food and energy prices, the picture is not rosy.
So-called core inflation rose 0.4% for the month and was still up 5.3% from a year ago, suggesting that while price pressures have eased, consumers are still under pressure. All of these figures are well within the Dow Jones consensus estimate.
A 3.6% drop in energy prices helped cap CPI gains for the month. Food prices rose just 0.2%.
However, a 0.6% increase in housing prices was the largest contributor to the increase in any item or headline CPI reading. Housing-related costs make up about one-third of the index's weight. Elsewhere, used car prices rose 4.4%, the same as in April, while transportation services rose 0.8%.
Markets showed little reaction to the news, although the Fed is expected to make a decision on interest rates at this week's meeting. Stock futures edged higher despite sharp falls in US Treasury yields. Pricing in the fed funds market did shift significantly, with traders pricing in a 93 percent chance the Fed won't raise its benchmark rate by the end of Wednesday's meeting. "Encouraging trends in consumer prices will give the Fed some leeway to keep rates on hold this month, and if that trend persists, the Fed will be in the red for the rest of the year," said Jeffrey Roach, chief economist at LPL Financial. A rate hike is unlikely."
The mild CPI reading was good news for workers. Average hourly earnings adjusted for inflation rose 0.3 percent during the month, the Bureau of Labor Statistics said in a separate release. Real incomes, which were negative for much of the inflation spike that began about two years ago, rose 0.2% on an annualized basis.
The CPI report is characterized by a growing divergence between the core and headline figures. The All Items index usually leads the food and energy indicators, but that has not been the case recently. The year-over-year difference between the two measures stems from soaring gasoline prices at this point in 2022. Eventually, gas pump prices will exceed $5 a gallon, which has never happened before in the United States. Gasoline prices have fallen 19.7 percent over the past year, Tuesday's BLS report showed. However, food prices Were still up 6.7% from a year ago, but egg prices fell 13.8% in May and are now slightly negative for 12 months after surgery in previous months. Housing prices rose 8 percent and transportation services rose 10.2 percent. Airline fares have also been falling , down 13.4% year-over-year.
