The Labor Department said Wednesday that the consumer price index did not rise in May, as inflation slightly weakened its powerful grip on the U.S. economy.
The CPI, a broad inflation measure that measures the cost of a variety of goods and services across the U.S. economy, was flat from the previous month but up 3.3% from a year ago, according to the Labor Department’s Bureau of Labor Statistics.
Economists surveyed by Dow Jones had expected a monthly increase of 0.1% and an annual gain of 3.4%.
Core CPI, which excludes volatile food and energy prices, rose 0.2% from the previous month and 3.4% from a year earlier, beating expectations of 0.3% and 3.5%, respectively.
Stock market futures rose following the report, while Treasury yields fell.
While top-line inflation fell for both the composite and core indexes, housing inflation rose 0.4% month-on-month and 5.4% year-on-year. Housing figures have been a sticking point for the Federal Reserve in its efforts to combat inflation and account for a large part of the CPI’s weighting.
But price increases were tempered by a 2% drop in the energy index and a slight 0.1% increase in food. Among energy items, gasoline prices fell 3.6%. Another troubling inflation item, auto insurance, fell 0.1% on a monthly basis but is still up more than 20% on an annual basis.
“The fact that both headline and core inflation came in above expectations was finally a positive surprise,” said Robert Frick, corporate economist at Navy Federal Credit Union. “While there was some relief at the gas pump, unfortunately home and apartment prices continue to rise, which are the main driver of inflation. We won’t see a meaningful decline in the CPI until housing costs start to make the much-needed comeback.”
The announcement comes at a critical juncture for the economy, as the Federal Reserve considers its next steps in monetary policy, which will be heavily influenced by the course of inflation.
Late Wednesday, the interest-rate-setting Federal Open Market Committee wraps up a two-day policy meeting. Markets are widely expected to keep the Fed’s target for overnight interest rates in the 5.25% to 5.50% range, but will be looking for clues as to where the central bank is headed.
The release of the Consumer Price Index (CPI) has futures traders raising the odds that the Fed will cut interest rates in September, which would be the first cut since the early days of the COVID-19 pandemic, but the market outlook is fragile, with Fed officials stressing that they need more than a month or two of strong data before easing policy.
“They need three more months of very good inflation data before they can cut rates in September,” said Joseph Labogna, chief economist at SMBC Nikko Securities. “If they start easing monetary policy or even talk about further easing, I think they’ll find it harder to achieve their goal of getting inflation back to 2 percent.”
Lingering inflation has kept the Fed on the sidelines since its last rate hike in July 2023. At their March meeting, FOMC members signaled they could cut rates three times this year for a total of 0.75 percentage points, but are expected to revise that to two or even one rate cut.
In addition, committee members will update their forecasts for gross domestic product (GDP) growth, inflation, and the unemployment rate, which may be affected by the CPI reading. Economists expect the Fed to raise its inflation forecast and lower its outlook for overall economic growth, as reflected by GDP.
The Fed doesn’t use the CPI as its main inflation measure, but it still factors it into its calculations. Policymakers focus more on the Commerce Department’s Personal Consumption Expenditures Price Index, a broader measure that takes into account changes in consumer behavior.
