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US consumer prices remained relatively flat through May with rising food costs offset by a drop in the price of gasoline. The consumer price index (CPI) rose 0.1% as expected vs. 0.3% the month prior.

Key Takeaways

• The CPI remained fairly flat at 0.1% as expected, pointing to moderate inflation pressures which may strengthen the view that the Fed should implement interest rate cuts this year.
• Food prices rose and gasoline prices fell, as did those for used motor vehicles and medical products.
• The CPI rose 1.8% annually after a 1.9% gain the month before, and core-CPI rose 2% annually vs. 2.1% for the 12 months through April.

The Labor Department released a report on Wednesday showing 0.1% growth in CPI on a monthly basis and 1.9% for the 12 months through May. This is fairly in line with the 0.1% monthly rate and 1.9% annual rate predicted by market analysts.

Excluding the volatile components of food and energy, the CPI rose 0.1% for the fourth month in a row. This measure, called core-CPI, was reportedly held down due to a drop in the price of used motor vehicles, trucks, and medical care products.

Gasoline prices dropped -0.5% after a 5.7% gain in April. Food jumped 0.3% after a -0.1% decline in April, and food consumed at home also rose by 0.3%. Owners’ equivalent rent of primary residence, the category including rents paid and received, rose 0.3% in May after an identical gain the month prior.

Healthcare costs rose 0.3% in May and in April, but prices for prescription medication dropped -0.2%. Clothing saw no change in May after dropping -0.8% in April. Used vehicles dropped 1.4%, the fourth monthly drop in a row. Motor vehicle insurance dropped -0.4%, the most since May 2007, and the cost of recreation also dropped. Airline tickets, new vehicles, and household furnishings all rose in May.

Core CPI out of the US past two years. Last May 2.2% this May 2.0%. Not as dramatic as change in headline CPI but makes for a more difficult case to justify rate cut regime #FOMC pic.twitter.com/VFnBNsyqA8

— James Stanley (@JStanleyFX) June 12, 2019

Inflation Pressures

Core-producer prices rose for the second month in a row according to a report released on Tuesday, leading to theories that the May core-CPI would also post solid growth.

As it stands, the current inflation data is slightly mixed and its unclear what the Fed will decide at its mid-June meeting regarding monetary policy and rate cuts. The financial markets have predicted two interest rate cuts by the end of 2019, but the central bank says that while policy is flexible, this is not currently on the cards.

Fed Chairman Jerome Powell made a statement last week to say that the Fed was monitoring the impact of the trade war on the US economy and would do everything in its power to maintain the current period of economic expansion. General market consensus holds that the Fed will not be implementing a rate cut during the upcoming meeting on June 18-19.

The Fed’s preferred inflation measure, the core personal consumption expenditures (PCE) price index, increased 1.6% in the year to April after gaining 1.5% in March. Data for May will be released later this month. The core PCE price index has been running below the Fed’s 2% target this year.

Market Reaction

Spot gold prices have risen following the report, with spot gold last trading at $1,333.50/oz, up 0.54% with a high of $1,338.23/oz and a low of $1,326.34/oz. Following the modest/muted inflation pressure report released by the Labor Department, gold has held gains reached earlier in the day which has seen weak and volatile activity in the world stock markets.