In May, inflation grew at a 4% annual pace, the lowest in two years.

The Labor Department announced Tuesday that inflation fell to its lowest annual rate in more than two years in May, easing pressure on the Federal Reserve to continue raising interest rates.

The consumer price index, which monitors increases in a wide range of goods and services, rose just 0.1% month on month, bringing the annual rate down to 4% from 4.9% in April. That 12-month gain was the smallest since March 2021, when inflation was just about to climb to its greatest level in 41 years.

Without variable food and energy costs, the picture was less rosy.

Core inflation climbed 0.4% month on month and 5.3% year on year, showing that, while price pressures have eased somewhat, consumers are still under assault.

All of the figures corresponded perfectly to the Dow Jones consensus projections.

A 3.6% drop in energy costs helped keep the month’s CPI growth in control. Food costs increased by only 0.2%.

The greatest contribution to the increase in the all-items, or headline, CPI figure was a 0.6% increase in housing costs. Housing expenses account for around one-third of the index’s weight.

Other than that, used car prices grew 4.4%, the same as in April, and transportation services increased 0.8%.

Markets reacted little to the publication, despite its expected importance in the Federal Reserve’s interest rate decision at its meeting this week. Stock market futures were modestly positive, while Treasury rates dropped dramatically.

In the Fed funds market, traders are pricing in a 93% likelihood that the Fed will not raise benchmark rates when its meeting closes on Wednesday.

“The encouraging trend in consumer prices will provide the Fed with some leeway to keep rates unchanged this month, and if the trend continues, the Fed will most likely not hike rates for the rest of the year,” said Jeffrey Roach, chief economist at LPL Financial.

The low CPI number was welcome news for employees. In a separate publication, the Bureau of Labor Statistics reported that average hourly earnings adjusted for inflation increased 0.3% month on month. Real earnings are up 0.2% year on year after being negative for much of the inflation increase that began approximately two years ago.

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The consumer price index data revealed a significant disparity between core and headline figures. The all-items index normally outperforms the ex-food and energy index, but that hasn’t been the case recently.

The year-over-year difference between the two metrics is due to rising gas costs at this time in 2022. Prices at the pump would eventually approach $5 per gallon, which had never happened in the United States previously. According to the BLS report released on Tuesday, gasoline prices have dropped 19.7% in the last year.

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Food costs, on the other hand, were still up 6.7% year on year, despite the fact that eggs decreased 13.8% in May and are now a marginally negative year on year after spiking in prior months. Housing costs have grown by 8%, while transportation costs have climbed by 10.2%. Airline fares have also been reducing, falling 13.4% year on year.

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