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Consumer price index unchanged in May

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CPI increases 3.3% on year-on-year basis

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Core CPI rises 0.2%; up 3.4% on year-on-year basis

By Lucia Mutikani

WASHINGTON, June 12 (Reuters) - U.S. consumer prices

were unexpectedly unchanged in May as cheaper gasoline offset

higher costs for rental housing, but inflation likely remains

too high for the Federal Reserve to start cutting interest rates

before September against the backdrop of a persistently strong

labor market.

The report from the Labor Department on Wednesday also

showed underlying inflation pressures abated last month. It

prompted financial markets to boost the probability that the

U.S. central bank would cut rates in September as well as in

December, which had been diminished by news last week that job

growth accelerated in May.

Fed officials later on Wednesday are expected to leave the

central bank's benchmark overnight interest rate unchanged in

the current 5.25%-5.50% range, where it has been since July.

"We don't know if the Fed has engineered a soft landing yet,

but the economy is slowing and price pressures are sure to

follow," said Christopher Rupkey, chief economist at FWDBONDS.

"Inflation has turned the corner, and the first quarter blow-up

is looking like it was an anomaly."

The unchanged reading in the consumer price index last month

followed a 0.3% increase in April, the Labor Department's Bureau

of Labor Statistics reported. It was the softest reading since

July 2022. The CPI has been trending lower since posting solid

readings in February and March.

Economists polled by Reuters had forecast the CPI would edge

up 0.1% in May. Price pressures could continue moderating as

major retailers, including Target ( TGT ), slash prices on goods

ranging from food to diapers as they seek to lure

inflation-weary consumers.

Higher inflation has soured Americans' perceptions of the

economy, which has continued to expand despite the Fed's

aggressive monetary policy tightening in 2022 and 2023, thanks

to labor market resilience. Inflation has eroded U.S. President

Joe Biden's popularity and could be among the factors that will

determine the outcome of the Nov. 5 presidential election.

Last month, gasoline prices dropped 3.6% after increasing

2.8% in April. Food prices edged up 0.1% after being unchanged

in April. Prices at the supermarket were unchanged amid a 1.3%

drop in milk.

There were also decreases in the prices of nonalcoholic

beverages. Prices of fruits and vegetables were unchanged.

But the cost of rent increased 0.4%, matching April's rise.

In the 12 months through May, the CPI advanced 3.3% after

increasing 3.4% in April. Though the annual increase in consumer

prices has slowed from a peak of 9.1% in June 2022, inflation

continues to run above the Fed's 2% target.

RENTS STABILIZING

The Fed has raised its policy rate by 525 basis points since

March 2022. Following the CPI data, short-term interest rate

futures implied about a 70% chance of a rate cut by September,

compared with about a 54% probability earlier. Traders also

added to bets on a second rate cut by December. Some economists

are leaning towards a rate cut in December, but others are not

sure the Fed will start its easing cycle this year.

U.S. stocks opened higher. The dollar slipped against a

basket of currencies. U.S. Treasury yields fell.

Excluding the volatile food and energy components, the CPI

climbed 0.2% in May. That was the smallest advance since last

October and followed a 0.3% rise in April.

Owners' equivalent rent (OER), a measure of the amount

homeowners would pay to rent or would earn from renting their

property, gained 0.4% for a third straight month. Market rents

have been trending lower, and that is expected to show in the

CPI data this year.

"With most of the slowing in market rents yet to feed

through to the CPI, and if the residual seasonality analysis is

correct, then core inflation is poised to decelerate sharply in

the second half of the year," said Conrad DeQuadros, senior

economic advisor at Brean Capital.

Healthcare costs rose 0.5%, with prescription medication

prices jumping 2.1%. The cost of hospital services increased

0.5%, but prices of physicians' services were unchanged. Prices

for used cars and trucks index rebounded 0.6% after declining

1.4% in April. Education services cost more, but airline fares

dropped 3.6% after falling 0.8% in April.

There were also decreases in the prices of new vehicles,

communication, recreation apparel as well as household

furnishings and operations. The cost of motor vehicle insurance,

one of the major drivers of core inflation, declined last month.

In the 12 months through May, the core CPI increased 3.4%.

That was the smallest year-on-year gain since April 2021 and

followed a 3.6% advance in April.