SUMMARY
- The inflation rate for May dropped to its lowest annual rate in over two years, according to a report by the Labor Department.
- Despite the overall decline, core inflation, which excludes fluctuating food and energy prices, remains elevated at 5.3% higher than a year ago.
- Market experts predict the eased inflation could influence the Federal Reserve to hold off on further raising interest rates.
In a promising development, the Labor Department revealed on Tuesday that the inflation rate for May has dipped to its lowest yearly figure in over two years. This easing inflation is expected to alleviate the mounting pressure on the Federal Reserve to persist with the upswing of interest rates.
The consumer price index, an important barometer that tracks alterations in a broad spectrum of goods and services, saw a minimal uptick of 0.1% for May. As a result, the annual rate plunged to 4% from the previous month's 4.9%, marking the most petite 12-month increase since the inflation surge began in March 2021, hitting its zenith in four decades.
Despite this positive news, when setting aside the volatile food and energy prices, the outlook remains less than encouraging. Core inflation, which excludes these fluctuating sectors, escalated by 0.4% in May and remains 5.3% higher than a year ago. These figures point towards consumers still grappling with significant price pressure. Interestingly, these numbers were exactly in alignment with the Dow Jones consensus estimates.
The driving factor in tempering the CPI for May was a significant 3.6% reduction in energy prices, coupled with a minimal 0.2% rise in food prices. However, the largest contributor to the increase in the overall CPI was the 0.6% surge in shelter prices, which makes up approximately a third of the index's weight. Used vehicle prices also rose by 4.4%, and transportation services experienced a 0.8% upturn.
Despite the report's expected influence on the Federal Reserve's impending decisions on interest rates, the markets remained largely unreactive. Traders in the fed funds market have strongly indicated their belief that the Fed will refrain from raising benchmark rates in its forthcoming meeting.
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