US May CPI data sows doubts about pace of Fed rate hikes

The cost of living in the States declined markedly last month amid widespread softness in the core components.

Wednesday's data appeared to irk some economists, especially coming as it did just hours before the Federal Reserve's policy announcement later that same day.

"We are suspicious of sudden breaks in data series in the absence of corroborating evidence, but these numbers have to be watched very closely over the next few months. This report won't stop the Fed hiking today, but if this trend continues through the summer then the next hike, which we have been expecting in September, will be delayed," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The headline rate of consumer prices dipped by 0.1% in May when compared to the month before, while the annual pace of advance declined from 2.2% in April to 1.9% for May, according to the Bureau of Labor Statistics.

Economists had penciled in a flat reading for the month-on-month rate of change and an annual rate of 2.0%.

At the 'core' level, CPI was ahead by 0.1% on the month and by 1.7% year-on-year (consensus: 1.9%).

Prices for commodities less food and energy fell by 0.3%, while those for new vehicles declined 0.2% and those for used cars and trucks by another two tenths of a percentage point.

Apparel prices also dropped, decreasing by 0.8% on the month, while those for medical care services retreated by 0.1%.

A 2.7% month-on-month drop in energy prices also weighed on the inflation reading for May.

"Today's soft inflation report reduces our conviction that the Fed will be able to raise rates for a third time in December. While we maintain a December rate increase in our baseline, it is conditional on evidence that inflation is resuming its firming trend," said Blerina Uruci at Barclays Research.

Nonetheless, both Pantheon and Barclays expected the Federal Open Market Committee to decide on an increase in the target range for the Fed funds rate by 25 basis points to between 1.0% and 1.25% following its meeting on Wednesday.