The numbers: U.S. consumer prices rose a scant 0.1% in May — held in check by cheaper gasoline — and could cement a decision by the Federal Reserve to “skip” an increase in interest rates this week.
The small rise in consumer prices matched the forecast of economists polled by the Wall Street Journal.
The Fed is meeting Tuesday and Wednesday to determine its next step in its fight against inflation. The central bank is widely expected to leave its benchmark U.S. interest rate unchanged at the end of its two-day meeting.
The yearly rate of inflation slowed to 4% from 4.9%, marking the lowest level since March 2021. Grocery and gas prices have been on the wane after helping drive up inflation last year.
Yet the so-called core rate of inflation that omits food and energy rose a stiffer 0.4% for the third month in a row, the government reported. Wall Street had forecast a 0.4% gain.
The Fed views the core rate as a better predictor of inflation trends. The increase in the core rate over the past 12 months slipped to 5.3% from 5.5%, the smallest gain since the fall of 2021.
These prices have fallen more slowly than the broader CPI, however, and suggest the fight against inflation is far from over.
Stock rose after the report. Treasury yields fell slightly.
Key details: A nearly 6% decline in seasonally adjusted gasoline prices was the chief reason for the low inflation reading in May.
The cost of groceries rose slightly in May after two declines in a row. Still, the yearly increase slowed to 5.8% last month from a peak of 13.5%.
What helped is a big drop in the cost of eggs. Prices sank 14% last month and have returned to normal. They spiked last year after a severe bout of avian flu.
The cost of eating out or getting takeout is still rising rapidly, however.
Housing, the single biggest category of the CPI, has become perhaps the biggest sore spot on the inflation front. Rents rose a sharply again and are up almost 9% in the past year.
Prices of used vehicles jumped for the second month in a row, but they’ve been on a downtrend over the past year.
Big picture: The doggedly high rate of inflation is far from the Fed’s 2% target and senior officials think it could take a few years to reach its goal.
The big question for the Fed is whether to raise interest rates again.
The Fed has jacked up a key short-term rate by 5 percentage points since the spring of 2022 from near zero. Now it wants to see how higher borrowing costs affect inflation and economic growth. That’s why many senior Fed officials appear to prefer to skip a rate hike this week.
If core inflation doesn’t subside more rapidly, however, the Fed might be forced to raise rates again and boost the odds of recession.
Looking ahead: “The largest risk to the economic outlook—that inflation would prove sticky, requiring the Fed to throw even more cold water on the economy—appears to have receded,” said chief economist Julia Pollack of ZipRecruiter.
“The drop in year-on-year inflation may give the Fed license to slow the pace of tightening, but not to pause long term unless participants are convinced inflation will slow further,” said chief economist Chris Low of FHN Financial.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
rose in Tuesday trades. The yield on the 10-year Treasury note
TMUBMUSD10Y,
increased slightly to 3.78%.
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