Inflation Remains Muted, Consumer Price Index Inches Up 0.1% in May

Andrew Klips |

Lower prices for food and slow economic growth worldwide helped keep inflation in check again in May, according to the latest report on the Consumer Price Index from the Labor Department on Tuesday. Constraints on wages because of a soft labor market, tax hikes due to the sequester, slowing growth in China and a recession in Europe have made it difficult for companies to raise prices in the States.

The government agency reported that the all-items Consumer Price Index rose only 0.1 percent, less than the 0.2 percent increase that economists had predicted. The so-called “core” CPI, which doesn’t include the volatile food and energy segments, rose by 0.2 percent, in line with expectations. May rise in CPI was the first since January. Compared to last May, the all-items CPI has increased just 1.4 percent, still well below 2.0 percent targets by the Federal Reserve. Core CPI was up by 1.7 percent compared to May 2012, the same amount as in April.

Economists and investors are closely monitoring the rise in the inflation as a barometer of when the Federal Reserve may begin to taper their $85-billion-per-month in economic stimulus. If inflation mushroomed too high or plunged too low, the Fed would likely cool its policy, but the benign rate will be interpreted by most as a sign that the easing efforts can continue for the time being anyway.

The report comes as the Federal Open Market Committee is meeting to discuss the health of the nation’s economy, quantitative easing and make a decision on keeping interest rates near zero. Fed Chairman Ben Bernanke will discuss the outcome of the meeting tomorrow afternoon.

During May, energy prices rose 0.4 percent, after dropping 4.3 percent in April. Even with the climb, energy prices are still down 1.0 percent compared to last May. Helping offset those increases last month, food prices at home were down 0.1 percent and food away from home prices slid 0.3 percent; it’s largest drop since July 2009.

The shelter index rose 0.3 percent during May and accounted for more than half of the all-items 0.1 percent increase. Compared to last year’s month, the shelter index is up by 2.3 percent.

The markets are responding favorably to the report from Washington. Separately, the Commerce Department reported that the housing industry continues to gain steam. After a stark decline in April from March, housing starts increased 6.8 percent in May to a seasonally adjusted rate of 914,000, although the rebound was still less than economists forecast.

In morning action, the Dow Jones Industrial Average is up nearly 100 points, the S&P 500 is higher by 8 points and the Nasdaq has advanced 23 points. The three benchmark indexes rose on Monday as well and with Tuesday’s climb have erased the losses from last week.

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