U.S. headline inflation decelerates slightly in May on fall in energy prices

U.S. headline inflation rose modestly on a sequential basis in May. CPI prices rose 0.1 percent, consistent with market expectations. On a year-on-year basis, the headline inflation slowed to 1.8 percent, owing to normalization of energy prices. Meanwhile, core prices came in weaker than expected, rising only 0.1 percent sequentially for the fourth consecutive month. Core inflation eased to 2 percent year-on-year.

Deceleration in core inflation was seen in both goods and services. Core services inflation eased to a 2 percent rise in May after two months of hotter gains. Core goods prices also continue to fall. Core rate was held back by declines in price for used cars and trucks, recreation, and motor vehicle insurance.

Shelter inflation eased as well, rising just 0.2 percent in May. However, medical care inflation continues to be strong. Apparel prices, which had fallen dramatically in the previous two months, were unchanged. Food prices rose 0.3 percent in May, taking year-on-year inflation higher to 2 percent, the highest it has been in four years.

The softness in inflation is beginning to look less transitory. While core CPI inflation is still at 2 percent, the Fed’s preferred measure has typically been a few ticks lower, and today’s report does not augur well for an uptick in inflation there.

“We may see higher inflation readings in the months ahead thanks to increased tariffs on Chinese imports. The Fed will try to look through these temporary prices increases when setting monetary policy, but that can be a tricky untangling job. Ultimately these higher tariffs cut purchasing power, and weigh on economic growth, which could weaken inflation in turn”, said TD Economics.

At 15:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was neutral at 32.2198. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex