The Labor Department reported Wednesday that the consumer price index showed no increase in May, as inflation slightly loosened its stubborn grip on the U.S. economy.
The Consumer Price Index, a broad measure of inflation that measures a basket of costs of goods and services across the U.S. economy, remained flat during the month despite rising 3.3% from a year ago, according to the department's Bureau of Labor Statistics.
Economists surveyed by Dow Jones were looking for a monthly gain of 0.1% and an annual rate of 3.4%.
Excluding volatile food and energy prices, core CPI rose 0.2% month-on-month and 3.4% from a year ago, compared to estimates of 0.3% and 3.5%, respectively.
In the wake of the report, stock market futures rose while Treasury yields fell.
Although overall inflation numbers were lower for all core items and measures, housing inflation rose 0.4% during the month and was up 5.4% from a year ago. Housing numbers have been a sticking point in the Fed's inflation battle and account for a large share of the CPI's weight.
However, the price rise was halted by a 2% drop in the energy index and only a 0.1% increase in food. In the energy component, gas prices fell by 3.6%. Another inflation component of concern, auto insurance, saw a monthly decline of 0.1% although it is still up more than 20% year-on-year.
“Finally, there are some positive surprises as headline and core inflation beat expectations,” said Robert Frick, corporate economist at Marine Federal Credit Union. “There has been relief at the pump, but unfortunately the costs of homes and apartments continue to rise and remain the primary driver of inflation. Until shelter costs begin their long-overdue decline, we will not see significant declines in the CPI.”
This release comes at an important juncture for the economy as the Federal Reserve considers its next steps regarding monetary policy, which will depend largely on the direction in which inflation is headed.
Later Wednesday, the interest rate-setting Federal Open Market Committee will conclude its two-day policy meeting. Markets widely expect the Fed to keep its key overnight borrowing rate in a range of 5.25%-5.50%, but will be looking for clues about the direction the central bank is heading.
Following the CPI release, futures traders increased the chances of a Fed cut in September, which would be the first downward move since the early days of the Covid pandemic. However, market expectations were volatile, and Fed officials stressed that they needed to see more than a month or two of positive data before easing policy.
“It will take another three months of very friendly inflation data to bring it down” in September, said Joseph LaVorgna, chief economist at SMBC Nikko Securities. “If they start easing or talk about easing more, I think they will complicate their own goals of getting inflation back to 2%.”
Perpetual inflation has kept the Fed on the sidelines since it last raised interest rates in July 2023. At the March meeting, FOMC members signaled they were likely to cut rates three times this year by a total of 0.75 percentage points, but they are expected to do so . Modify this to either two reductions or even just one.
In addition, panelists will update their forecasts on GDP growth as well as inflation and unemployment, all of which could be affected by CPI numbers. Economists expect the Fed to raise its inflation forecasts and lower expectations for broad economic growth as reflected in gross domestic product.
Although the Fed does not use the CPI as a leading indicator of inflation, it still appears in the calculations. Policymakers are focusing more on the Commerce Department's Personal Consumption Expenditures Price Index, a broader measure that takes into account changes in consumer behavior.
