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May Inflation Comes In Lower Than Expected

U.S. consumer prices climbed a paltry 0.1% in the month of May, smaller than the 0.4% increase the previous month as falling fuel and electricity prices eased inflationary pressure. The Consumer Price Index(CPI)  increased 4.0% Y/Y, also an improvement from the previous month’s 4.9%Y/Y increase. Economists polled by Reuters had forecast at least a 0.2% M/M CPI increase and a 4.1% gain on a year-on-year basis.

Gasoline prices fell 5.6% while utility gas also cost less. However, food prices increased 0.2% in large part due to an increase in the prices of fruits and vegetables, nonalcoholic beverages and other food products. Meat, eggs and fish prices recorded declines of 13.8%. Unfortunately, rents, used cars and truck prices remain stubbornly high.

The report by the Labor Department comes a day ahead of a key Fed decision on interest rates on Wednesday. The Fed's rate hikes have led to a stronger dollar, making dollar-denominated commodities more expensive and weighing on oil and commodity prices. While still above the Fed’s target inflation rate of 2%, the trend of easing price pressures in recent months might persuade the central bank to pause its aggressive rate hike. The Fed has hiked its policy rate by 500 basis points in this tightening cycle.

"The moderate slowing provides the Fed room to pause its rate hikes this week. However, if economic data continues to surprise to the upside and inflation remains sticky, the door is open for another rate hike in the coming months, as soon as July," Kathy Bostjancic, chief economist at Nationwide in New York, has told Reuters.

Wall Street has lately become increasingly bearish about oil prices, with oil ultrabull Goldman Sachs again lowering its Brent forecast for December, this time to $86 a barrel from $95 and $100 before that. GS cited increasing supply from Russia, Iran and Venezuela; growing recession fears and persistent headwinds to higher prices from higher interest rates for his growing bearishness. Low oil prices will help keep inflation in check.

By Alex Kimani for Oilprice.com

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