According to the Department of Labor, the consumer price index edged 0.1 percent higher in May after two straight months of declines. The core index, which does not factor food and energy costs, increased by 0.2 percent, slightly higher than April’s numbers. The strengthening of these indices may be a comfort to Federal Reserve policymakers who want to avoid any chance of a debilitating bout of deflation.
The U.S. central bank monitors the core index closely because it is less volatile and provides a better sense of price trends, was up 1.7 percent in the 12 months through May. The increase matched the gain in April and suggested that a downward trend in core inflation might be coming to an end after a year of decreases. This indicates a rise in consumer demand.
Federal Reserve officials worry that a big drop in inflation could lead to a spiral of falling prices and wages. With less risk of deflation, the Fed could become more comfortable with eventually paring back its bond-buying stimulus. The Fed began a two-day meeting on June 17th and is expected to leave a bond-buying stimulus program unchanged.
While May's reading for 12-month core inflation remains below the Fed's 2 percent inflation target, a stabilization could make the Fed more comfortable paring back its economic stimulus programs as soon as this fall.
The overall CPI was up 1.4 percent from a year-ago in May, up three-tenths of a percentage point from the prior month. Also in May, the core price index rose with support from a 0.2 percent increase in clothing prices and a strong 0.3 percent increase in shelter costs.
With the US economy showing signs of strengthening, the Fed is generally seen to be moving closer to cutting back on its extraordinary support for the U.S. economy. This is despite tax hikes and government spending cuts this year. The Fed has been buying $85 billion in bonds each month to lower borrowing costs and spur hiring.