Inflation Dips to 4%, Lowest Level in Two Years

Inflation Dips to 4%, Lowest Level in Two Years

Consumer prices rose 0.1% in May, their lowest annual pace of increase in two years as lower energy contributed to the easing, the Labor Department reported on Tuesday.

Year over year, the rate of inflation dipped to 4% from 4.9% in April.

Excluding often volatile food and energy costs, the core CPI rose 0.4%, or 5.3% annually, down from April’s 5.5% pace

Energy prices declined by 3.6% in May with gasoline costs dropping 5.6%. Food costs rose slightly, by 0.2%.

The release of the widely known inflation metric comes as the Federal Reserve meets to consider monetary policy with an announcement due on Wednesday. Economists expect the central bank to keep rates unchanged after more than a year and 10 hikes in interest rates in what could be a critical juncture for Fed policymakers.

The Fed will also issue an update of its estimates for the economy this year and beyond. That is likely to show that economic growth is doing better than the central bank had expected but also that inflation has been running hotter than projected.

“The Fed’s updated summary of economic projections will likely show higher near-term growth and inflation forecasts (versus last quarter) and lower unemployment rate expectations,” said Jonathan Duensing, head of US fixed income at Amundi US. “Chair (Jerome) Powell will need to reinforce inflation fighting vigilance during the press conference.”

Although inflation is double the 2% annual rate target of the Fed, it has declined steadily from the 9.1% level set in June of last year.