US CPI for May comes in short of forecasts

12 June 2019

(Sharecast News) - Consumer prices in the US slipped by more than expected last mnonth amid declines in the price of energy and for used cars and trucks.
According to the <em>Department of Labor</em>, the year-on-year rate of increase in headline consumer prices slipped from 2.0% in April to 1.8% for May (consensus: 1.9%).

A 0.6% month-on-month drop in energy prices lay behind the dip in CPI, alongside a 1.4% fall - for a fourth consecutive month - in the cost of second-hand vehicles, and a 0.4% decline in the price of medical care commodities.

Prices for medical care services on the other hand rose by 0.5%.

At the core level meanwhile, which excludes food and energy, CPI was up by 0.1% versus April and up 2.0% on a year ago (consensus: 2.1%) - its lowest reading for 15 months.

In April, core CPI rose at a clip of 2.1%.

Commenting on Wednesday's figures, Ian Shepherdson, chief economist at Pantheon Macroeconomics, stressed the role played by falling user car prices in muffling gains in core CPI, with the three-month rise in core CPI excluding used cars at 2.0%.

Prices for used cars surged by 2.5% in September and October 2018 in the wake of hurricanes Florence and Michael and were now mean-reverting.

"This process now looks to be over, and we expect CPI used car prices to be broadly flat over the next few months. The current 3-month annualized rate is -11.6%, so this will relieve a good deal of downward pressure on the core CPI," Shepherdson said.

And medical service costs were up by 2.8% on the year, rising at their quickest pace for two years, he added.

"Overall, these data show that core CPI inflation is stable at about 2%, after dipping slightly in the six months through Jan," he said.

But Mickey Levy at <em>Berenberg Capital Markets</em> wasn't buying it.

"The May CPI, producer price index, and a slew of business surveys point to only modest inflation," Levy told clients.

"Measures of long-run inflation expectations in consumer surveys remain near the lower end of historical ranges and market-based measures of inflation expectations have declined and are influencing price and wage setting behavior.

"[...] Because inflation is persistently below the Fed's 2% target, the Fed perceives it has the flexibility to ease its policy and remain consistent with its longer-run dual mandate ("Fed to lose "patience" and cut rates this year", June 6, 2019). We expect the Fed to cut its policy rate twice this year."