Consumer prices in May rose at slowest annual rate since April 2021

Consumer prices rose at the slowest pace since April 2021 as inflation showed further signs of cooling in May, according to the latest data from the Bureau of Labor Statistics released Tuesday morning.

The Consumer Price Index (CPI) revealed headline inflation rose 0.1% over last month and 4% over the prior year in May, a slowdown from April’s 0.4% month-over-month increase and 4.9% annual gain.

Both measures were roughly in line with economist forecasts of a 0.1% month-over-month increase and 4.1% annual increase, according to data from Bloomberg.

Although the 4% jump in headline inflation represents a continued slowdown, it’s still significantly above the Federal Reserve’s 2% target.

The Fed has been raising interest rates to try to bring down inflation, but the central bank risks sending the economy into a recession by hiking rates too high too fast. The Fed has signaled it could pause its hikes, saying it would continue to assess incoming data ahead of the June meeting.

On a “core” basis, which strips out the more volatile costs of food and gas, prices in May climbed 0.4% over the prior month and 5.3% over last year. Both measures were also in line with economist expectations.

Core inflation remained especially sticky last month as rent prices continue to surge. The index for both rent and owners’ equivalent rent rose 0.5% each. Owners’ equivalent rent is the hypothetical rent a homeowner would pay.

The shelter index, which jumped 8% annually and 0.6% between April and May, was the largest factor in the monthly increase of core inflation, accounting for over 60% of the total increase. Among the other indexes that rose in May was the index for used cars and trucks, which increased 4.4% for the second straight month, and the index for motor vehicle insurance, which increased 2%, the BLS noted.

The energy index decreased 11.7% for the 12 months ending in May, while the food index increased 6.7% over the last year. The energy index decreased 3.6% from April to May on a seasonally adjusted basis, led by a 7.7% drop in fuel oil prices, while food prices rose 0.2%.

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Egg prices fell a whopping 13.8% in May after dropping 1.5% in April and 10.9% in March.

U.S. stocks edged higher in early trading following the release of the data. Treasury yields fell about 7 basis points to around 3.70%.

The inflation data set will be a critical economic indicator ahead of the Federal Reserve’s monetary policy decision on Wednesday.

It’s the last piece of data following a strong May jobs report, coupled with resilient readings on both the services and manufacturing sectors.

Markets were pricing in a roughly 95% chance the Federal Reserve keeps rates unchanged in June immediately following the release of the data, according to data from the CME Group. The Fed raised interest rates at each of its previous 10 meetings.

“It would likely have taken a meaningful upside inflation surprise to convince the Fed to hike in June,” Seema Shah, chief global strategist at Principal Asset Management, wrote in reaction to the data. “With inflation coming broadly in line with expectations, the pressure is off.”

“Tomorrow is likely to be the first FOMC meeting since March 2022 without a policy rate hike. Yet, with annual core inflation actually rising further in May and coming hot off the heels from the very strong jobs report, the July FOMC meeting is very much live,” the strategist added.

Gargi Chaudhuri, BlackRock’s Head of iShares Investment Strategy, agreed, writing in a new note: “We think the Fed will pause their rate hikes tomorrow and will keep the doors open for potential rate increases in the future if economic data necessitates it.”

“They will buy themselves the maximum amount of optionality by signaling at least one further hike by the end of 2023, aligned with market expectations, and will guide towards a “skip” instead of an extended pause to sit and observe the effects of raising rates 5% since the beginning of the hiking cycle,” he continued.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected]

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