US consumer prices rise moderately; underlying inflation strong
The latest data indicates that the US Federal Reserve could continue its rate hikes later in the summer.
US consumer prices barely rose in May and the annual increase in inflation was the smallest in more than two years, although underlying price pressures remained strong, supporting the view that the Federal Reserve would leave rates unchanged on Wednesday and an aggressive stance would assume.
The smaller-than-expected rise in the consumer price index (CPI) reported by the U.S. Department of Labor on Tuesday reflected declines in the cost of energy products and services, including gasoline and electricity. But rents remained sticky and used car and truck prices continued to rise. The report was released as Fed officials prepared for a two-day policy meeting.
“It probably would have taken a significant upward inflation surprise to convince the Fed to raise rates in June,” said Seema Shah, chief global strategist at Principal Asset Management. “But with core annual inflation rising further in May and coming on the heels of the very strong jobs report, the July Fed meeting is alive and well.”
The CPI rose 0.1 percent last month as gasoline prices fell. The CPI rose 0.4 percent in April. In the 12 months to May, the CPI rose by 4 percent. That was the smallest year-on-year increase since March 2021 and followed a 4.9 percent increase in April.
The annual CPI peaked at 9.1 percent in June 2022, the biggest increase since November 1981, and is tapering off as last year’s large increases are out of the calculation.
Economists polled by Reuters had forecast CPI to rise 0.2 percent last month and 4.1 percent year-on-year.
This month’s data presented a mixed picture for the labor market, with nonfarm payrolls rising solidly in May but the unemployment rate rising to a seven-month high of 3.7 percent from a 53-year low of 3 .4 percent in April.
Economists believe the gradual slowdown in inflation and the labor market will give the Fed room to skip a rate hike on Wednesday for the first time since March 2022, as the U.S. central bank embarked on its fastest monetary tightening campaign in more than 40 years.
The Fed, which has raised its policy rate by 500 basis points in this tightening cycle, is expected to leave the door open for further rate hikes.
US stocks would open higher. The dollar fell against a basket of currencies. US Treasury bond prices rose.
Economic slowdown
With the economy showing signs of slowing, economists believe the Fed should pause further rate hikes while assessing the impact of steps it has taken so far to cool demand.
General inflation is slowing thanks to energy and food costs. Food commodity prices have fallen back to pre-Russian invasion of Ukraine in February 2022.
Excluding these volatile categories, however, inflation proves to be persistent, remaining well above the Fed’s 2 percent target.
So-called core CPI rose 0.4 percent in May, up by the same margin for the third straight month.
High rents continued to put upward pressure on core CPI, with used cars and trucks also boosting. The rise in used cars and trucks reflects the delayed impact of increases during the winter and early spring.
After May, however, core inflation is expected to slow, driven by a moderation in rents and a resumption of price declines for used cars and trucks. Rental vacancy rose to its highest level in two years in the first quarter, while independent measures show rents falling.
Rent measures in the CPI are usually several months behind independent meters. In the 12 months through May, core CPI climbed 5.3 percent, after rising 5.5 percent in April.