• CPI prices rose a modest 0.1% (month-on-month) in May, in line with market expectations. The headline inflation rate lost a bit of momentum to 1.8% year-on-year (y/y), thanks to a normalization of energy prices.
  • Core prices were softer than expected, up only 0.1% m/m for the fourth straight month. Core inflation lost momentum to 2.0% y/y.
  • The loss of momentum in core inflation was seen in both goods and services. Core services inflation cooled to a 0.2% increase (m/m) in May after two months of hotter gains. Core goods prices also continue to fall (-0.1% m/m).
  • Core inflation was held back by price declines for used cars and trucks (-1.4% m/m), recreation (-0.3%), and motor vehicle insurance. Shelter inflation also cooled a bit, up 0.2% in May (versus 0.4% in April). But, medical care inflation continues to be solid (+0.3% m/m). Apparel prices, which had fallen dramatically in the previous two months, were unchanged.
  • Food prices rose 0.3% in May, taking year-on-year inflation higher to 2.0%, the highest it has been in four years.

Key Implications

  • The weakness in inflation is starting to look less transitory. While core CPI inflation is still at 2.0%, the Fed’s preferred measure has typically been a few ticks lower, and today’s report does not bode well for an uptick in inflation there. If the Fed is looking for data to justify a more dovish stance at next week’s policy meeting, this is it.
  • We may see higher inflation readings in the months ahead thanks to increased tariffs on Chinese imports (see our recent report U.S. and China Exchanging Tariff Blows – Round 3). The Fed will try to look through these temporary prices increases when setting monetary policy, but that can be a tricky untangling job. Ultimately these higher tariffs cut purchasing power, and weigh on economic growth, which could weaken inflation in turn.


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