The U.S. annual inflation rate slowed in May, defying economists' expectations and providing Federal Reserve policymakers hope that progress on inflation has been revived.
Last month, the consumer price index eased to 3.3 percent, down from 3.4 percent in April. This was slightly below the market forecast of 3.4 percent but represented the 38th consecutive month of inflation above 3 percent.
Inflation was zero percent monthly and below the consensus estimate of 0.1 percent.
Core CPI, which strips the volatile energy and food components, slowed to 3.4 percent in May, down from 3.6 percent in the previous month. This was also below the market estimate of 3.5 percent.
Additionally, the 3- and 6-month annualized core CPI fell to 3.3 percent and 3.8 percent, respectively.
Core inflation rose at a smaller-than-expected pace of 0.2 percent, down from 0.3 percent.
Services inflation also dipped to 5.2 percent in May, the first monthly decline since January.
Supercore inflation, which excludes housing and is the Fed's preferred measurement, was unchanged monthly and eased to 4.8 percent year-over-year.
John Lynch, the CIO of Comerica Wealth Management, anticipates further moderation this year, with "inflation hovering in the 3 percent range this year."
Automobiles, Shelter, and Oil Prices
The energy index fell 2 percent monthly and eased to 3.7 percent in the 12 months ending in May. Gasoline prices declined 3.5 percent and fell to 2.2 percent year-over-year. Electricity costs were unchanged in May and stayed at an annualized rate of 5.9 percent.While crude oil prices have advanced around 7 percent in the last week, they experienced an immense decline in May as the war risk premium from Middle East tensions eroded gains. The decline in the oil benchmark helped gasoline prices tumble despite the start of the busy summer driving season.
In other news for drivers, motor vehicle insurance dipped 0.1 percent from April to May, but it is still up more than 20 percent compared to the same time a year ago.
CPI data has highlighted how much motor vehicle insurance has increased, fueled by high automobile prices, rising car repair costs, and a jump in disaster-related claims.
Last month, new vehicles tumbled 0.5 percent month-over-month, and are down 0.8 percent in the 12 months ending in May.
Used cars climbed 0.6 percent monthly but the subcategory is down 9.3 percent year-over-year.
Shelter continues to remain elevated in the CPI report, rising 0.4 percent and climbing for the fourth straight month. On a year-over-year basis, the shelter category is up 5.4 percent.
Industry data show that there is little relief on the way for tenants.
The good news is that growth has flatlined "because there are enough new apartments to meet demand, even in the busiest time of year for the rental market," the residential real estate services firm noted.
Public policymakers, including Fed Chair Jerome Powell, have insisted for the past 18 months that shelter costs will come down by now.
When pressed by reporters at the post-meeting press conference in May regarding housing costs, Mr. Powell conceded that there was a "little bit of uncertainty."
Market Reaction
The financial markets turned positive midweek, with the leading benchmark indexes up as much as 1 percent in pre-market trading.U.S. Treasury yields were mostly red across the board. The benchmark 10-year yield fell below 4.3 percent. The 2- and 30-year yields slumped to 4.71 percent and 4.46 percent, respectively.
The U.S. Dollar Index (DXY), a gauge of the greenback against a basket of currencies, tanked 0.71 percent following the CPI report to below 104.50.
Investors cheered on the data because it could improve the odds of a rate cut, says Giuseppe Sette, the president of market research services firm Toggle AI.
"Chances of a 2024 rate cut remain balanced," he said. "Inflation is certainly not rising, but neither is it falling fast. With a strong and healthy job market, the Fed can stick to its historical playbook and keep rates well above CPI."
Nevertheless, the "war against inflation continues," notes Mark Hamrick, the senior economic analyst at Bankrate.
"Higher for longer with rates remains the mantra concerning monetary policy, meaning that borrowing costs will remain elevated in the near-term," Mr. Hamrick said in a statement.
The Fed will conclude its two-day monetary policy meeting on Wednesday. The market is widely expecting the central bank to keep interest rates unchanged.