US consumer prices increase as expected in May

Irving Hamilton
June 14, 2018

Last month's increase in both the CPI and core CPI was in line with economists' expectations.

The inflation is back in the U.S., with the headline Consumer Price Index (CPI) rising 2.8% over the year in May, approaching 3% level.

The Fed tracks a different inflation measure, which is just below its 2 percent target.

The past inflation is rising, but the question is how sustainable and how persistent the inflation in the U.S. is as transport, tobacco, and housing items were the main upside contributors to the USA inflation in May. Fed officials are expected to raise rates on Wednesday for the second time this year. This slower growth in core prices likely means that the Federal Reserve will raise interest rates only gradually.

A separate Labour Department report on Tuesday illustrated how higher prices are pinching wallets: average hourly wages, adjusted for inflation, were unchanged in May from a year earlier, even as nominal pay accelerated to a 2.7% annual gain from 2.6% in April.

The dollar .DXY held gains versus a basket of currencies immediately after the data before falling to trade slightly lower.

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USA inflation accelerated in May to the fastest pace in more than six years, reinforcing the Federal Reserve's outlook for gradual interest-rate hikes while eroding wage gains that remain tepid despite an 18-year low in unemployment.

The Fed's preferred inflation measure, the personal consumption expenditures price index excluding food and energy, rose 1.8 percent on a year-on-year basis in April, matching March's increase. Fed officials have indicated they would not be too concerned with inflation overshooting the target. Several regional factory surveys have shown manufacturers paying more for raw materials this year. The unemployment rate fell to 3.8 percent in May, matching the lowest in 48 years and signaling the central bank is nearing its maximum-employment goal.

"There is inflation out there on the horizon but it is largely a mirage policymakers think will disappear when the economy gets there", said Chris Rupkey, chief economist at MUFG in NY. Gasoline prices climbed 1.7 per cent in May and jumped 21.8 per cent from a year ago.

Following a 0.3% increase in April, the USA food index stayed constant in May, owing in part to a 0.7% decline in meats, poultry, fish, and eggs, as well as a 0.3% fall in fruits and vegetables. Healthcare costs nudged up 0.1 percent in April.

Healthcare costs gained 0.2 percent last month, with prices for prescription drugs jumping 1.4 percent and the cost of hospital visits rising 0.5 percent. The preferred core index was up 1.8 percent from the prior year. Prices for apparel and recreation were unchanged in May.

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