Inflation dropped to a 1.9 percent annual rate in May, the Bureau of Labor Statistics reported Wednesday, in a sign that price pressures continue to ease in the U.S. even as the Federal Reserve is expected to continue tightening monetary policy later Wednesday.
May's slowdown in inflation was bigger than expected. Private-sector forecasters had expected annual inflation to slip from 2.2 percent to 2 percent.
Core inflation slowed to just 1.7 percent, the lowest rate since May of 2015. Core inflation is viewed as less volatile and more predictive of the future than headline inflation, because it strips out food and energy prices that can move significantly from month to month.
Early in 2017, inflation had appeared to be headed higher, after years of running mostly below target. With summer around the corner, however, the situation seems to have reversed. Between April and May, prices actually fell 0.1 percent.
Wednesday's report was published just hours before the Federal Reserve was expected to announce an interest rate decision after a two-day meeting in Washington, a decision that often hinges on officials' view of inflation. Most Fed officials have said that they view the recent inflation slowdown as transitory, and that they expect it to pick back up as the unemployment rate continues to fall.
It's possible that the May inflation data will complicate the Fed's decision. Before Wednesday, investors saw a 0.25 percent rate hike as a virtual certainty. After the inflation report, bond market prices indicated that some doubt crept in regarding the decision, but they still reflected a very high probability of an increase in the rate target.
The Fed targets 2 percent inflation over the long term, although that target is based on a separate inflation measures. Although zero inflation or falling prices are better for consumers in the sense that their dollars go further, the Fed prefers stable inflation at the 2 percent target to set public inflation expectations and as an indication that the economy is running at full strength.
One reason to think that the recent inflation slowdown will prove temporary is that it partly reflects a major change in the pricing of cell phone services. Over the past year, as providers have competed with each other to offer unlimited data plans, mobile service prices have dropped 12.5 percent. That effect alone has taken 0.22 percentage points off of the overall inflation rate.
Price gains for medical services have also cooled off. Over the past 12 months, physician services have only risen 0.8 percent in price, the smallest such increase ever.
College tuition and fee hikes also notched the slowest-ever 12-month increase, at just 1.7 percent.