Inflation cools in May, giving the Fed room to cut rates

There was good news on the U.S. inflation front in May as both the headline and core rates of the Consumer Price Index rose less than forecast.

Both headline and core U.S. inflation came in lower than expected in May, the Bureau of Labor Statistics reported on Wednesday.

The CPI rose 0.1% last month, the BLS said. Economists had been expecting 0.2% and April's pace was 0.2%.

On a year-over-year basis, the CPI climbed 2.4% against estimates for 2.5% and April's 2.3%.

Core CPI, which strips out the volatile food and energy categories, rose 0.1% last month versus forecasts for 0.3% and 0.2% in April. Year-over-year core CPI was 2.8% versus an expected 2.9% and 2.8% in April.

The headline CPI reading came in lower than expected but still clocked in at an annual rate of 2.4%, above the Federal Reserve's 2% inflation target. Economists polled by Dow Jones had anticipated a headline CPI increase of 0.2% on the month and a year-over-year rise of 2.5%. In April, the CPI had risen 0.2% from March and 2.3% from last year.

The core CPI reading came in lower than expected but still clocked in at an annual rate of 2.8%, above the Federal Reserve's 2% inflation target. Economists polled by Dow Jones had anticipated a core CPI increase of 0.3% on the month and a year-over-year rise of 2.9%. In April, the core CPI had risen 0.2% from March and 2.8% from last year.

The report also showed that the price index for food rose 0.1% in May after advancing 0.3% in April. The energy index declined 0.4% last month, contrasting with April's 0.8% increase. On a year-over-year basis, food prices surged 9.7%, whereas energy prices dropped 1.1%.

According to researchers at Point Seven Fintech, the decrease in inflation might be attributed to a shift in the weighting scheme used in the CPI calculation. This year, the "basket of goods and services" consumed by typical urban consumers, which is used to determine the CPI, now includes a greater emphasis on used cars and housing, both of which experienced slower price growth. Conversely, there is less weight on air fares and food away from home, categories that saw faster inflation.

"The market is certainly expecting the Fed to begin cutting rates later this year, and despite some mixed signals on inflation, that view seems to be sticking," said Point Seven Fintech researchers in a note.

"We can fully price in two rate cuts—the first in September and the second in December. For the moment, at least, this morning's fresh data isn't altering that calculus."

A check of traditional markets finds U.S. stock index futures reversing earlier declines and now in the green by about 0.4% across the board. The 10-year Treasury yield is lower by five basis points to 4.45%.