Over all, the Consumer Price Index rose 0.7 percent in May, the Labor Department reported. The core rate, which excludes food and energy, was up just 0.1 percent, a welcome development that encourages the Federal Reserve to keep interest rates steady.
The news on the core rate, which has been inching steadily downward, cheered investors, who continued a stock rally that started midweek.
But for consumers, the news was hardly reassuring. Prices for staple household purchases like gasoline and food rose to even higher levels last month, effectively causing most Americans to take a pay cut. After taking inflation into account, the average weekly earnings for workers in nonmanagement jobs — some 80 percent of the work force — fell for the second consecutive month in May.
Consumer sentiment readings are reflecting some of that unease. A closely watched survey by the University of Michigan released yesterday found that consumer confidence this month dropped to the lowest level in 10 months. Americans also now expect significantly higher inflation than they expected a few months ago, the survey said.
Wall Street viewed the diminishing core rate of inflation as something that would put central bankers at ease. Core inflation, which economists and Federal Reserve officials consider a better measure of underlying price pressures because it excludes volatile food and energy prices, rose at a slower annual pace for the third consecutive month.
What Wall Street sees as good news, however, is not always good news for the average working American.
“Everybody has to eat, and everybody has to drive to work,” said Mark Vitner, senior economist for Wachovia. “For households, the headline number truly is the more important number, and clearly the run-up in gasoline prices in the last few months has left consumers with less money to spend on everything else.”
“I guess we need to walk to work and bring a brown bag lunch,” he added.
Gas prices jumped 10.5 percent last month, compared with an increase of 4.7 percent in April. Food prices rose 0.3 percent but are up sharply so far this year.
Beef prices have risen 5.1 percent, poultry prices 4.3 percent and pork prices 3.4 percent.
But steady and falling prices for other goods held down core inflation to 2.2 percent for the last 12 months. In April, the annual rate was 2.3 percent, while the monthly rate was 0.2 percent.
Overall inflation increased 2.7 percent annualized in May, compared with 2.6 percent in April. On a monthly basis, it was 0.4 percent in April.
Much of the reason for the ebbing in core inflation is housing costs, which are heavily weighted in the core calculation. They are rising more slowly than they were a year ago.
Core inflation may be easing, but few economists think the Fed could seriously consider lowering interest rates this year. For one thing, economic growth is expected to pick up again the remainder of this year. Also, it is still unclear whether rising energy prices will seep into other prices and push inflation higher.
But at the very least, the lower inflation readings lately could help convince Fed officials that interest rates do not need to go higher. The possibility they could be pressed to increase rates sent shivers through the stock market last week.
The downward trend of core inflation could also allow the Fed to change the language in its statement after policy makers meet, typically a precursor to a rate cut. In its statements so far, the central bank has held firm to its view that inflation is the biggest threat to the economy.
Ian Shepherdson, chief United States economist with High Frequency Economics, said in a research report yesterday that the recent trajectory of inflation raises “the question of just how long the Fed can credibly continue to argue that there is upside inflation risk.”
But the Fed is known to move at a glacial pace when it comes to any shift in tenor.
“It’s too early to say that inflation isn’t an issue,” said James Knightley, senior economist with ING Wholesale Banking. Like other economists who examined the numbers yesterday, Mr. Knightley noted that the 0.1 percent core inflation figure for May was rounded down from 0.149 — a negligible difference from April’s 0.177 percent.
Because energy prices remain volatile, it is to the Fed’s benefit to keep talking tough on inflation to prevent any spillover into the rest of the economy.
“Retailers are discounting to prevent losing customers who are struggling to pay their gasoline bills,” said Christopher Low, chief economist with FTN Financial.
“When energy prices are rising, other prices tend to rise less. When energy prices fall back, other prices will sort of regain some. Because of that, there’s inevitably always something for Fed officials to worry about.”