Rising US consumer prices are slowing; Core inflation is constant

WASHINGTON (Reuters) – U.S. 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 will keep interest rates unchanged. . Wed with the adoption of a hard line.

The smaller-than-expected rise in the Consumer Price Index, reported by the Labor Department on Tuesday, reflected lower costs for energy products and services, including gasoline and electricity. But rents have remained steady and prices for used cars and trucks have increased. The report was released as Federal Reserve officials kicked off a two-day policy meeting.

“A moderate slowdown provides room for the Federal Reserve to hold off on its interest rate increases this week,” said Kathy Bostancic, chief economist at Nationwide in New York. “However, if economic data continues to surprise to the upside and inflation holds steady, the door is open for another rate hike in the coming months, as early as July.”

The Consumer Price Index rose 0.1% last month after rising 0.4% in April. Gasoline prices fell 5.6%, while electricity fell for the third month in a row. The cost of utility gas is also lower.

However, food prices rose 0.2% after remaining unchanged for two consecutive months as prices of fruits, vegetables, non-alcoholic beverages and other food products rose. But meat and fish were cheaper, while eggs fell 13.8%, the highest since January 1951.

In the twelve months through May, the CPI rose 4.0%. This was the smallest year-on-year increase since March 2021 and was followed by a 4.9% rise in April.

The annual consumer price index peaked at 9.1% in June 2022, the largest increase since November 1981, and is declining as last year’s surge falls behind the accounts.

Economists polled by Reuters had expected the consumer price index to rise 0.2 percent last month and gain 4.1 percent year-on-year.

President Joe Biden welcomed price moderation. “While there is more work to be done… I have never been more optimistic that our best days lie ahead,” Biden said in a statement.

Stocks rose on Wall Street, with the S&P 500 and Nasdaq indexes hitting one-year highs. The dollar fell against a basket of currencies. US Treasury rates rose after the data.

Gradual slowdown

Data this month showed resilience in the labor market, with non-farm payrolls increasing strongly in May. While the unemployment rate rose to a seven-month high of 3.7%, that was from a 53-year low of 3.4% in April.

Economists believe gradual inflation and a slowing labor market give the Federal Reserve leeway to hike interest rates on Wednesday for the first time since March 2022 when the US central bank embarked on its fastest monetary tightening campaign in more than 40 years.

The Fed, which raised interest rates by 500 basis points in this tightening cycle, is expected to leave the door open for further rate increases.

Economists argue that the Fed should hold off on further rate hikes while it assesses the impact of the steps it has taken so far to moderate demand.

Overall inflation is slowing, thanks to energy and food costs. Food commodity prices have fallen back to levels seen before Russia’s invasion of Ukraine in February 2022. Commodity prices fell 0.2% in May after rising 0.6% in the previous month. But inflation is proving flat except for these volatile categories, still well above the Fed’s 2% target.

Alleged core CPI rose 0.4% in May, up by the same margin for the third month in a row. The cost of services rose 0.3% after rising 0.2%.

Owners’ equivalent rent (OER), a measure of the amount homeowners will pay for rent or earn from renting their properties, rose 0.5% for the third month in a row. But with the rental vacancy rate rising to a two-year high in the first quarter and independent measures showing rents on a downward trend, a slowdown is expected this year. Rental actions in the CPI tend to lag independent measures by several months.

Airfare prices fell 3.0%. Services excluding energy rose 0.4%, matching April’s gain.

By economists’ calculations, prices for essential services outside of housing rose 0.2% after rising 0.1% in April. The so-called supercore is monitored by policy makers, although they focus more on the corresponding action in the PCE price index data.

Used cars and trucks increased 4.4% after advancing by the same margin in April. The rise, which reflects the delayed impact of increases in auction prices during the winter and early spring, contributed to commodity prices rising 0.6% for the second month in a row.

But home furnishings fell 0.6%, the first decline in nearly two years and also the largest decline since August 2009. After May, however, headline inflation is expected to slow, driven by a moderation in rents and a resumption of lower prices for used cars and trucks.

In the twelve months through May, the core CPI increased by 5.3%. This was the smallest rise since November 2021 and followed a 5.5% increase in April.

“We expect a significant slowdown in core prices in the coming months,” said Michael Pugliese, chief economist at Wells Fargo in New York. “However, directional progress should not be confused with mission accomplished. There is a lot of ground to cover in the fight against inflation, which should prevent the Fed from cutting rates until 2024.”

(Reporting by Lucia Mutecani) Editing by Chizu Nomiyama, Paul Simao and Andrea Ricci

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