US consumer prices unexpectedly fall; core inflation benign

Fed has 2% inflation target, tracks an inflation measure which is currently at 1.5%

US 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 Labor Department said on Wednesday its Consumer Price Index dipped 0.1 per cent last month after rising 0.2 per cent in April. The second drop in the CPI in three months could worry Federal Reserve officials, who have previously viewed the weakness in inflation as transitory.

While the US central bank is expected to raise interest rates by 25 basis points at the end of two-day meeting later on Wednesday, weak inflation, if sustained, could put further monetary tightening this year in jeopardy.

The Fed has a two per cent inflation target and tracks an inflation measure which is currently at 1.5 per cent.

In the 12 months through May, the CPI increased 1.9 per cent.

That was the smallest increase since last November and followed a 2.2 per cent gain in April. The year-on-year gain in the CPI was still larger than the 1.6 per cent average annual increase over the past 10 years.

Economists polled by Reuters had forecast the CPI unchanged last month and advancing two per cent from a year ago. The so-called core CPI, which strips out food and energy costs, edged up 0.1 per cent last month after a similar gain in April. The monthly core CPI was restrained by decreases in the prices of apparel, airline fares, communication and medical care services.

The core CPI increased 1.7 per cent year-on-year, the smallest rise since May 2015, after advancing 1.9 per cent in April. May's increase was just below the 1.8 per cent average annual increase over the past decade.

Last month, rental costs increased 0.3 per cent, matching April's gain. Owners' equivalent rent of primary residence advanced 0.2 per cent after a similar increase in April.

Gasoline prices tumbled 6.4 per cent, the largest drop since February 2016, after jumping 1.2 per cent in April. Food prices rose for a fifth straight month.