U.S. Core Inflation Cools, Bolstering Case for Fed Rate Cut

(Bloomberg) -- A closely watched measure of U.S. inflation trailed forecasts in May, reinforcing the case among investors for the Federal Reserve to cut interest rates.

The core consumer price index, which removes energy and food costs, rose 2% from a year earlier, according to a Labor Department report Wednesday. Economists surveyed by Bloomberg had predicted a 2.1% increase. Monthly core price-rises, as well as a wider measure of annual inflation, also came in below estimates.

Stocks declined on the report, which follows other signs of slowing economic growth at home and abroad -- as well as uncertainty over the impact of President Donald Trump’s tariffs on Chinese goods -- that have bolstered expectations for Fed rate cuts this year. The market-implied odds of a July cut increased, with Fed funds futures now indicating almost a quarter-point of easing in the next two months.

The CPI numbers show “there are limited inflation pressures in the U.S. economy right now,” said Leslie Preston, senior economist at Toronto-Dominion Bank. “It gets harder and harder to dismiss the benign inflation on any one factor or any month-to month swing.”

Core prices rose 0.1% from the previous month for a fourth straight time, missing estimates of a 0.2% gain. The broader CPI increased an annual 1.8%, less than projected.

A sharp drop in used-car prices helped drive the monthly change, while cheaper gasoline played a role in keeping broader inflation tame. Energy prices fell 0.6% from the prior month and 0.5% from a year earlier as all major components in the category fell on an annual basis.

Apparel prices were unchanged after two steep declines. Readings have trended lower after the Commerce Department changed its data collection methodology.

Fed Target

At the same time, inflation is showing signs of firming by another measure that the Fed prefers. That core price gauge -- linked to spending and excluding food and energy -- firmed in April for the first time this year, though remained below the Fed’s 2% target. It tends to run slightly below the Labor Department’s CPI.

Powell, in a speech last week, opened the door to interest-rate cuts after holding in May that below-target inflation was due to transitory factors. Bond-market investors expect the central bank to lower rates as it tries to brace the economy for slowing global growth, lower corporate spending and a weaker consumer outlook.

Trump has maintained public pressure on the Fed to cut interest rates, lamenting Monday that he didn’t have China-style control over monetary policy. Fed officials will next meet June 18-19.

While Trump raised tariffs on some Chinese goods early in May, the impact wouldn’t apply broadly until imports reach their final destination and may not filter through into consumer prices for some time.

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• The report showed used-car prices dropped 1.4% from the prior month while new car prices increased 0.1%; The index for motor insurance dropped the most since 2007.
• Shelter costs rose 0.2%, as owners-equivalent rent, one of the categories that tracks rental prices, increased 0.3%. Rent of primary residence rose 0.2%.
• Food costs rose 0.3% from the prior month after a decline in the prior period; Expenses for medical care commodities were down 0.4%.
• Economists surveyed by Bloomberg had forecast the core gauge would rise 0.2% from the prior month and 2.1% from a year earlier, with corresponding gains of 0.1% and 1.9% projected for the broader index.

--With assistance from Kristy Scheuble and Sophie Caronello.

To contact the reporters on this story: Katia Dmitrieva in Washington at edmitrieva1@bloomberg.net;Reade Pickert in Washington at epickert@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Jeff Kearns, Ben Holland

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