A key report on US inflation indicated a slowdown in consumer price increases for May, according to data from the Bureau of Labor Statistics released Wednesday morning. The Consumer Price Index (CPI) was flat month-over-month and rose 3.3% year-over-year, down from April’s 0.3% monthly increase and 3.4% annual gain. Both figures exceeded economist expectations. A decrease in energy prices, particularly gasoline, played a significant role in pushing the headline CPI down.
On a core basis, excluding volatile food and gas prices, the CPI increased 0.2% from April and 3.4% over the previous year, both slightly cooler than April’s data and better than expected by economists. Markets responded positively to the report, with the 10-year Treasury yield (^TNX) dropping approximately 12 basis points to around 4.29%. This inflation update precedes the Federal Reserve’s policy announcement at 2 p.m. ET.
Inflation remains stubbornly above the Fed’s 2% annual target. While this CPI report may not heavily influence the imminent Fed decision, its timing has added to the anticipation surrounding the announcement. Fed officials describe the path to 2% inflation as “bumpy,” with recent economic data reinforcing their “higher-for-longer” stance on interest rates.
On Friday, the Bureau of Labor Statistics reported the addition of 272,000 nonfarm payroll jobs in May, far exceeding the 180,000 forecasted by economists. Wages grew by 4.1%, outpacing estimates, while the unemployment rate ticked up slightly to 4% from 3.9%. The Fed’s preferred inflation measure, the core PCE price index, remains sticky, with a year-over-year increase of 2.8% in April, consistent with March. Investors now anticipate one to two 25-basis-point rate cuts in 2024, down from the six expected earlier this year, per Bloomberg data.
Post-data release, markets priced in a roughly 69% chance of a Federal Reserve rate cut at its September meeting, up from about 53% the previous day, according to CME FedWatch Tool data.
Sticky Shelter Prices and Falling Energy Costs
Noteworthy details from the inflation report include the shelter index, which rose 5.4% annually, slightly slower than April. The monthly increase of 0.4% was the largest contributor to the core CPI, according to the BLS. Economists attribute higher core inflation readings largely to persistent shelter costs.
The indexes for rent and owners’ equivalent rent (OER) each increased by 0.4% monthly, mirroring April’s rise. OER represents the hypothetical rent homeowners would pay for their own property. Lodging away from home fell 0.1% in May, following a 0.2% decline in April.
Energy prices dropped in May, led by a notable decrease in gas prices. The energy index fell 2% month-over-month after a 1.1% rise in April and climbed 3.7% annually.
Gas prices decreased by 3.6% from April to May after a 2.8% rise in the previous month.
The food index rose 2.1% year-over-year, with a 0.1% monthly increase from April to May. Food at home remained unchanged, while food away from home grew by 0.4%.
Other indexes that rose in April included medical care, used cars and trucks, and education, while airline fares, new vehicles, communication, recreation, and apparel saw monthly declines, according to the BLS.
