The rise in US consumer goods prices slowed down more than expected in May, official statistics showed on Tuesday, fuelling expectations that the Federal Reserve (Fed) might pause interest rate hikes following its monetary policy meeting scheduled on Wednesday.

The Department of Labor's Consumer Price Index (CPI) increased by 0.1% in May month-on-month, compared to a 0.4% rise in April, and by 4.0% year-on-year, compared to 4.9% in April. Economists interviewed by Reuters had predicted on average that inflation would slow to 0.2% on a monthly basis and 4.1% annually.

Excluding volatile items such as food and energy, underlying inflation, or core CPI, rose by 0.4% in May on a monthly basis, while on an annual basis it increased by 5.3%, in line with the estimates of the economists interviewed by Reuters. The US economy is showing signs of cooling down, and economists now believe that the Fed could put interest rate hikes on hold, in order to assess the impact its monetary policy is having on the economy.

“CPI inflation data has made it clear that the Fed now needs to take a summer holiday with regard to monetary policy,” said Naeem Aslam, head of investment at Zaye Capital Markets.
However, underlying inflation is proving resilient, sitting well above the Fed’s 2% target.

High rents continue to sustain the inflation’s momentum, as well as the prices of second-hand cars and trucks, which were slow to react to the increases recorded in winter and spring.

“A significant surprise in the inflation’s evolution would have probably been needed to convince the Fed to raise rates in June,” said Seema Shah, chief strategist at Principal Asset Management. “But with underlying inflation still rising in May, and strong employment data, the outcome of the Fed's July meeting is not a foregone conclusion.”

However, underlying inflation is expected to decline after May, dampened by lower rents and lower prices for second-hand cars and trucks. Meanwhile, Wall Street was buoyant as Treasury yields rebounded after falling sharply when inflation data was released.