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The Consumer Price Index headline number was flat in May, cooler than the +0.1% expected and stalling from the 0.3% increase in April, the U.S. Department of Labor said on Wednesday.
On a year-over-year basis, the price gauge increased 3.3% Y/Y, less than the 3.4% expected and +3.4% in the prior month.
Shelter cost inflation remained stubborn, rising 0.4% M/M in May and offsetting a decline in gasoline prices. The index for food rose 0.1% over the month, with the food-away-from-home index climbing 0.4% and the food-at-home index unchanged.
Core CPI, which strips out volatile food and energy prices, also eased somewhat last month, rising 0.2%, compared with +0.3% expected and +0.3% prior.
That puts the year-over-year pace for core CPI at 3.4%, an improvement from +3.5% expected and better than the +3.6% pace in April, but still well above the Federal Reserve's goal of 2% inflation.
"The inflation for May surprised to the downside, and if the June and July core CPI comes at 0.2% M/M, the Fed is likely to cut in September, but that's a big IF given that shelter is still up 0.4% M/M," said Seeking Alpha Analyst Damir Tokic. "This report is positive for the stock market over the near term."
Indeed, U.S. equity futures stayed firmly in the green before the opening bell. Nasdaq future increased 1.0%, S&P futures +0.8% and Dow futures +0.7%. Bonds also rose. The 10-year US Treasury yield fell 10 basis points to 4.30%.
Ian Shepherdson of Pantheon Macroeconomics pointed out that the 0.163% core CPI print is the lowest since August 2021. "The streak of massive increases in auto insurance prices has come to a sudden halt," he said.
Other prices that rose during the month include medical care, used cars and trucks, and education. Among those that declined were airline fares, new vehicles, communication, recreation, and apparel, the U.S. Bureau of Labor Statistics said.
With the cooling in May's CPI, traders have ratcheted up their bets that the Federal Reserve will cut its benchmark rate in September. The probability of a 25-basis-point cut at that meeting rose to 62.8% from 46.8% on Tuesday, and the odds that the federal funds rate will stay at 5.25%-5.50% slid to 27.3% from 47.2%, according to the CME FedWatch tool.
"Softer data clears the way for [Fed Chair Jerome] Powell to be as dovish as he needs to be today to offset the likely shift from three rate cuts implied by the March dot plot to the two that we expect this afternoon," said RSM US Chief Economist Joseph Brusuelas on social media platform X. "It's going to be a 'Big Wednesday,'" he added, referring to the Federal Reserve's policy statement that comes out at 2:00 PM ET today.