US May Consumer Prices Fell 0.1%, Annual Increase Below 2.0%

USA consumer prices unexpectedly fell in May as the cost of gasoline and a range other goods declined, pointing to a moderation in inflation pressures that could impact on further interest rate increases this year.

The U.S. Labor Department said Wednesday that the consumer price index edged down 0.1% last month following a small 0.2% increase in April.

The increase in the short-term rate by a quarter-point to a still-low range of 1 percent to 1.25 percent could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers. The Australian dollar rose 1.25 percent to the highest against its USA counterpart since April 3 after the release of the data.

The so-called core CPI, which strips out food and energy costs, rose 0.1 percent in May after a similar gain in April as rents continued to increase moderately.

Yet the more recent softening trend might give the Fed space to continue to raise interest rates at a gradual pace. The U.S. dollar has usually softened in 2017; however, this is not yet showing up in higher prices at the consumer level, said TD Economics.

And gasoline stations saw sales drop 2.4 percent, the biggest decline since February of previous year. Monthly prices fell for apparel, airfare, communication and medical care services, the Labor Department said.

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The dollar index was last down 0.6 percent at 96.437, after earlier touching its lowest since November 9 at 96.323. Further rate hikes are likely to depend on the outlook for inflation and economic growth.

The 12-month overall price measure fell below the Fed's two per cent target to 1.9 per cent last month, continuing a steady decline since February, while the core, which has been falling since January, slipped another two-tenths to 1.7 per cent. Those figures would rise in increments over a year until they reached $30 billion a month in Treasurys and $20 billion in mortgage bonds.

Turning to retail sales, those fell by 0.3% month-on-month in May, marking their biggest drop since January a year ago.

Economists polled by Reuters had forecast the CPI unchanged last month and advancing 2.0 percent from a year ago. Receipts at service stations dropped 2.4 per cent, the largest decline since February 2016. That has led some retailers, including Macy's, Sears and Abercrombie & Fitch to announce shop closures.

CPI inflation in May is at the lower end of the RBI's projected headline inflation band of 2-3.5 per cent in the first half the current fiscal. The 2.7 percent fall in energy prices mainly drove the drop in consumer price index. Sales at electronics and appliance stores plunged 2.8 per cent, the largest drop since March 2010. Over the past 12 months, food costs are up just 0.9 percent while energy prices have risen 5.4 percent. Receipts at restaurants and bars dipped 0.1 per cent, while sales at sporting goods and hobby stores fell 0.6 per cent.

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