US consumer prices slow in May; core inflation sticky
US CONSUMER prices rose moderately in May, leading to the smallest annual increase in inflation in more than two years, though underlying price pressures remained strong, supporting views that the Federal Reserve would keep interest rates unchanged on Wednesday while adopting a hawkish posture.
The consumer price index (CPI) increased 0.1 per cent last month as petrol prices fell, the Labor Department said on Tuesday (Jun 13). The CPI had gained 0.4 per cent in April.
In the 12 months through April, the CPI climbed 4.0 per cent. That was the smallest year-on-year increase since March 2021 and followed a 4.9 per cent rise in April.
The annual CPI peaked at 9.1 per cent in June 2022 – which was the biggest increase since November 1981 – and is subsiding as last year’s large rises drop out of the calculation.
Economists polled by Reuters had forecast the CPI gaining 0.2 per cent last month and increasing 4.1 per cent year on year.
The report was published as Fed officials prepared to gather for a two-day policy meeting.
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Data this month offered a mixed picture of the labour market, with non-farm payrolls increasing solidly in May, but the unemployment rate rising to a seven-month high of 3.7 per cent from a 53-year low of 3.4 per cent in April.
Economists believe that the gradual inflation and labour market slowdown give the US central bank enough room to skip raising interest rates on Wednesday for the first time since March 2022. The Fed had embarked on its fastest monetary policy tightening campaign in more than 40 years then.
Several policymakers, including Fed chair Jerome Powell, have signalled that they prefer to skip a rate hike at the upcoming meeting, while still leaving the door open to future tightening if needed.
The Fed, which has hiked its policy rate by 500 basis points, is expected to leave the door open to further rate increases.
With the economy showing signs of slowing, economists argue that the Fed should pause further rate increases, while assessing the impact of the steps it has taken so far to cool demand. They generally agree the central bank will leave rates unchanged on Wednesday, but the next CPI report due in July will play a key role in determining what the Fed will do at that month’s meeting.
Overall inflation is decelerating, thanks to energy and food costs. Food commodity prices have fallen back to levels seen prior to Russia’s invasion of Ukraine.
Inflation is, however, proving to be sticky excluding these volatile categories; it remains well above the Fed’s 2 per cent target.
The so-called core CPI, which excludes food and energy, increased 0.4 per cent in May, rising by the same margin for the third straight month.
High rents continued to put upward pressure on the core CPI, with used cars and trucks also providing a boost. The rise in used cars and trucks reflects the delayed impact of increases during winter and early spring.
Beyond May, however, core inflation is expected to slow, driven by a moderation in rents and resumption in price declines for used cars and trucks.
The rental vacancy rate rose to a two-year high in the first quarter, while independent measures have been showing rents on a downward trend.
Rent measures in the CPI tend to lag the independent gauges by several months. In the 12 months through May, the core CPI climbed 5.3 per cent after increasing 5.5 per cent in April.
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