US Inflation Slows to Lowest Level in 2 Years as Food, Energy Prices Continue Downward Trend
The annual inflation rate slowed to 4 percent in May, down from 4.9 percent in April, according to the Bureau of Labor Statistics (BLS). This came in below the consensus estimate of 4.1 percent and represented the lowest level in two years.
On a month-over-month basis, the consumer price index (CPI) rose just 0.1 percent, down from 0.4 percent and below the market estimate of 0.2 percent.
The core CPI slowed to 5.3 percent year-over-year, down from 5.5 percent in the previous month. This also matched economists’ expectations. Core inflation climbed 0.4 percent, unchanged from the previous month, and met the market projection. The monthly core CPI has risen 0.4 percent or more for six consecutive months.
Food prices fell to 6.7 percent on an annualized basis, with supermarket prices easing to 5.8 percent. Food away from home remained above 8 percent.
Within the food index, the most notable development was the crash in egg prices, plummeting 13.8 percent month-over-month. Eggs are now down 0.4 percent year-over-year.
Meat prices dropped more than 1 percent in May, but beef and veal are beginning to trend higher, as a chorus of food economists had warned. The beef and veal category jumped 1 percent, uncooked ground beef surged 2 percent, uncooked beef roasts rose 1.2 percent, and uncooked beef steaks inched 0.1 percent higher.
Among the kitchen staples, bread prices remain 12.5 percent higher than a year ago, flour is up more than 17 percent year-over-year, rice swelled 7.1 percent, and coffee increased 4.8 percent on an annualized basis.
Fruits and vegetables increase at a significant pace on a monthly pace, rising 1.4 percent. This included a 1.9 percent spike in apples, a 5.3 percent jump in lettuce, a 0.7 percent boost in tomatoes, and a 1.4 percent increase in frozen fruits and vegetables.
Margarine remained elevated, soaring 22.5 percent year-over-year and 2.1 percent month-over-month.
Baby food and formula were 10.1 percent more expensive than in the same period a year ago and surged 1.2 percent month-over-month.
The energy index declined 11.7 percent year-over-year and 3.6 percent from April to May. Gasoline dropped 5.6 percent month-over-month, and fuel oil plunged 7.7 percent on a monthly basis. Electricity costs slipped 1 percent in May, but they are still up 5.9 percent compared to the same time a year ago.
New vehicles dipped 0.1 percent month-over-month, while used cars and trucks surged 4.4 percent for the second consecutive month. Transportation services surged 0.8 percent, and the sub-index is up 10.2 percent year-over-year.
The shelter index rose 0.6 percent month-over-month and advanced 8 percent in the 12 months ending in May. Rent of shelter and owners’ equivalent rent of residences were each up 8 percent from a year ago and rose 0.5 percent from April to May.
Apparel prices jumped 0.3 percent.
Medical care commodities edged up 0.6 percent, but medical care services slid 0.1 percent.
Looking ahead to the June CPI, the Federal Reserve Bank of Cleveland’s Inflation Nowcasting suggests an annualized rate of 3.3 percent and a 0.4 percent month-over-month increase. The core CPI is expected to ease to 5.1 percent and climb 0.4 percent on a monthly basis.
The next key inflation metric will be producer prices. The May producer price index (PPI) is forecast to ease to 1.5 percent year-over-year and tumble 0.1 percent month-over-month. The core PPI is also anticipated to slow to 2.9 percent and rise 0.2 percent month-over-month.
In pre-market trading, the financial markets recorded tepid gains following the CPI data.
The U.S. Treasury market was red across the board, with the benchmark 10-year yield down nearly 8 basis points to below 3.69 percent. The 1-month bill shed more than 2 basis points to around 5.16 percent.
The U.S. Dollar Index (DXY), which gauges the greenback against a basket of currencies, tanked roughly 0.5 percent after the inflation numbers were published.
FOMC Expectations
For many market observers, the May CPI figures are crucial for what the Federal Reserve does at the end of its two-day Federal Open Market Committee (FOMC) policy meeting.
According to the CME FedWatch Tool, the central bank is expected to hit the pause button on interest rates, leaving the benchmark fed funds rate in the range of 5 and 5.25 percent.
But even if the FOMC chooses a rate pause, some officials argue that this might not signal the end of its quantitative tightening campaign. Some have alluded to the recent decisions by the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA).
After an unexpected increase in inflation, the BoC raised interest rates by 25 basis points this month following a two-meeting pause. The RBA left its policy rate unchanged in April and then pulled the trigger on two straight rate hikes.
Whatever happens at the June FOMC meeting, some economists purport that this is not the end of the hiking cycle.
“We now expect rates to be raised again at the July meeting. And although we still think that falling inflation and weak GDP growth will convince the Fed to move to the side-lines soon, it is now likely to take until early next year for officials to be ready to start cutting again,” wrote Andrew Hunter, the deputy chief U.S. economist at Capital Economics, in a note.
The futures market is also pricing in a quarter-point hike in July.
