Consumer prices stable

Overall CPI prices fell 0.2% in May, in line with consensus forecasts, and the year-over-year headline CPI inflation rate slowed to 2.0% from 2.2%. Core CPI prices were also in line with forecasts, rising 0.1% in May. The year-over-year core CPI inflation rate was unchanged at 0.9%.

Lodging away from home prices increased 2.5% (within travel-related prices, lodging away from home has increased 18.2% at an annual rate over the last three months and airfares, which rose 1.8% in May, are up 19.0% on the same basis).

BOTTOM LINE

With headline inflation at 2% (ideal from the Fed’s perspective) and core inflation below 1% (too low from the Fed’s perspective), there is nothing in the CPI inflation data to persuade the Fed to alter its “extended period” language at next week’s FOMC meeting. Throw in the disappointing private payroll increase for May and concerns over European financial markets, and we see very little chance of the Fed doing anything other than reaffirming its commitment to exceptionally low rates on June 23rd. Our long-held view is that the Fed would not hike rates before the March 2011 FOMC meeting. However the risk is growing that the first hike may not come until the second half of next year.

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