According to a report from the Labor Department on Tuesday, the inflation rate experienced a cooling effect in May, reaching its lowest annual rate in over two years. This development is expected to alleviate pressure on the Federal Reserve to continue raising interest rates.
In May, the consumer price index, a measure of changes in various goods and services, only increased by 0.1% for the month, resulting in an annual level of 4%. This 12-month increase marks the smallest since March 2021, when inflation began to rise, eventually reaching its highest point in 41 years.
However, when excluding the volatile prices of food and energy, the situation appears less optimistic. Core inflation, which excludes these factors, rose by 0.4% for the month and remained 5.3% higher compared to the previous year. This indicates that while price pressures have somewhat eased, consumers still face challenges.
All the aforementioned figures align precisely with the consensus estimates of Dow Jones.
The CPI gain for the month was kept in check by a 3.6% decline in energy prices, while food prices only rose by 0.2%.
Nevertheless, the increase in shelter prices by 0.6% was the primary contributor to the rise in the all-items or headline CPI reading. Housing-related costs account for approximately one-third of the index's weighting.
In other areas, used vehicle prices remained steady, increasing by 4.4%, the same as in April, while transportation services saw an increase of 0.8%.
Despite the significance of this data in the Federal Reserve's decision on interest rates during this week's meeting, the market response was relatively muted. Stock market futures showed slight positivity, while Treasury yields experienced a sharp decline.
Notably, pricing in the fed funds market underwent a significant shift, with traders indicating a 93% probability that the Fed would not raise benchmark rates when the meeting concludes on Wednesday.
"The encouraging trend in consumer prices will provide the Fed some leeway to keep rates unchanged this month, and if the trend continues, the Fed will likely refrain from hiking rates for the remainder of the year," commented Jeffrey Roach, Chief Economist at LPL Financial.
The benign CPI reading brought good news for workers as well. The Bureau of Labor Statistics, in a separate release, reported that average hourly earnings adjusted for inflation rose by 0.3% for the month. On an annual basis, real earnings have increased by 0.2% after being negative for a significant portion of the inflation surge that commenced approximately two years ago.
The consumer price index report highlighted a growing discrepancy between the core and headline numbers. Normally, the all-items index tends to be higher than the ex-food and energy measure, but this has not been the case in recent times.
The year-over-year gap between these two measures can be attributed to the surge in gas prices witnessed in 2022 during the same period. Ultimately, gasoline prices surpassed $5 per gallon, an unprecedented occurrence in the United States. According to the BLS report released on Tuesday, gasoline prices have fallen by 19.7% over the past year.
However, food prices remained 6.7% higher than a year ago, although there was a 13.8% decline in egg prices in May, leading to a slight negative figure on a 12-month basis after previous surges. Shelter prices have risen by 8%, and transportation services have increased by 10.2%. Airline fares have also been in decline, dropping by 13.4% year over year.
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