EmailConsumer inflation growth slowed in May as prices increased 0.2%, down from 0.4% in April. The Briefing.com consensus expected the CPI to increase 0.1%.
Energy prices fell 1.0% in May, the first decline in 10 months, as gasoline prices fell 2.0%. However, the drop in gasoline prices was statistical as the nonseasonally adjusted price increased 3.6%.
The collapse in the food prices in the PPI did not pass-through to consumer prices. The food component of CPI increased 0.4%, the same rate as April. We expect food prices to moderate in conjunction with the May PPI data in June.
Excluding food and energy, core prices increased 0.3%, the largest increase since July 2008. The consensus expected core prices to increase 0.1%.
We expect the surge in core prices is temporary and that prices will moderate soon.
Even though most core sectors experienced positive price growth, most of the price gains were weak and inconsequential. The main contributor came from a 1.0% increase in new and used motor vehicles. Production slowdowns from Japanese motor vehicle and parts producers following the earthquake and tsunami caused supply shortages and with it higher prices. These prices contributed 0.08 percentage points to core CPI growth.
As production in Japan comes back over the next couple of months, the supply constraints will be alleviated. This should cause motor vehicle prices to return to previous levels and weaken core inflation growth.
Furthermore, even with the strongest core inflation increase in nearly two years, year-over-year prices increased only 1.5%. This is well below the Fed's target level of 2.0% - 2.5% core CPI growth and will not adversely affect the current loose monetary policy conditions that are in place.
