Inflation Slows to 4% In May, But Sticky Core Prices Keep Summer Fed Rate Hike Bets Alive

Updated at 8:48 am EDT

U.S. inflation slowed to a fresh two-year low in May, data from the Commerce Department indicated Tuesday, but sticky core consumer price pressures have failed to alter forecasts for a summer rate hike from the Federal Reserve.

The headline consumer price index for the month of March was estimated to have risen 4% from a year earlier, down from the 4.9% pace recorded in April and just inside the Wall Street consensus forecast of 4.1%. The annualized increase, however, marks the eleventh consecutive month of decline for headline inflation which peaked at 9.1% in June of last year.

On a monthly basis, inflation was up 0.1%, the BLS said, compared to a 0.4% reading in April and the Wall Street forecast of a 0.2% acceleration. Monthly inflation peaked at 1.3% in June of last year.

So-called core inflation, which strips out volatile components such as food and energy prices, rose 0.4% on the month and 5.3% on the year, the report noted. The key monthly reading matched Wall Street forecasts and the annual reading rose 0.x% from the previous month's tally.

U.S. stocks were modestly higher following the data release but pared gains into the session, with futures tied to the S&P 500 indicating a 16 point opening bell gain and the Dow Jones Industrial Average suggesting a 44 point advance. The tech-focused Nasdaq indicated up 122 points.

Benchmark 10-year Treasury note yields were little-changed at 3.703% in volatile trading while 2-year notes were pegged at 4.523%.

The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.36% lower at 1013.281.

CME Group's FedWatch is now pricing in a 79.2% chance that the Fed will hold its benchmark Fed Funds rate steady at between 5% and 5.25% when it makes its decision tomorrow at 2:00 pm EDT in Washington.

Bets on a July hike, however, were holding at around 71%.