Highlights:
- The all items index unexpectedly fell 0.1% in May to bring the year-over-year rate down to 1.9% from 2.2% in April.
- Energy price inflation moderated to 5.4% year-over-year as gasoline prices fell for the third time in four months.
- A 0.2% monthly rise in food prices provided some offset in May as that component continued to emerge from a period of deflation late last year.
- The year-over-year rate of inflation excluding food and energy fell to 1.7% from 1.9%, the slowest rate in more than two years.
- Core prices have been roughly flat over the last three months, the weakest streak since 2010. Falling goods prices and weaker-than-usual services inflation have both been factors.
- Some transitory factors have been at play, including a decline in the price of wireless phone services, though underlying inflation does appear to have moderated in recent months.
Our Take:
US inflation fell short of expectations for a third consecutive month in May. We don’t see today’s shortfall impacting the Fed’s decision to raise rates this afternoon, a move that is universally expected and fully priced in by markets. But the recent moderation in inflation could lend a more dovish tone to Chair Yellen’s press conference. Minutes of the Fed’s May meeting indicated most participants "viewed the recent softer inflation data as primarily reflecting transitory factors". However, a further decline in core inflation and less upward pressure from energy prices should leave the Committee less comfortable with that view. Continued moderation in market-based measures of inflation expectations, now back at pre-election levels, could also have some bearing. Offsetting slower inflation is further tightening in labour market conditions that indicates limited slack in the economy and the potential for price pressure to pick up going forward. With that in mind, we expect the Fed will take the long view on inflation and continue to signal that a gradual withdrawal of accommodation is appropriate beyond today’s move.
