US core inflation, which excludes food and energy, rose by just 0.1% in May — the fourth month in a row that gains have come in below expectations. That persistent softness suggests businesses are not broadly passing higher tariff or input costs on to consumers.
Key takeaways:
- Annual core inflation is 2.8%.
- Goods prices were essentially flat for the month, with notable declines in motor vehicles and clothing.
- Service-sector prices increased modestly by 0.2%, while categories such as airfares and hotel stays moved lower.
- Financial markets reacted favorably: Treasury yields fell as bond prices rallied, the dollar weakened, and equity markets climbed.
- Following the data, traders priced in roughly a 75% probability that the Federal Reserve will cut interest rates by September.
The muted inflation report bolsters arguments for potential Federal Reserve easing later in the year. With core inflation running below recent expectations and inflationary pressures in both goods and certain services easing, policymakers may view the data as supportive of rate reductions if the trend continues. Market responses — lower yields, a softer dollar and higher stock prices — reflect investor confidence that monetary policy could become more accommodative.
While the headline readings are encouraging for those watching inflation, it’s important to note variations within categories: some services are still rising at a steady pace even as travel-related prices and parts of goods inflation retreat. Ongoing monthly reports will be important to confirm whether the recent pattern of subdued core inflation persists and to shape the Fed’s policy outlook.