CPI Up .7%; Core Up .1%

From the BLS:

On a seasonally adjusted basis, the CPI-U advanced 0.7 percent in May, following a 0.4 percent increase in April. The index for energy increased sharply for the third consecutive month--up 5.4 percent in May. The index for petroleum-based energy rose 9.8 percent while the index for energy services declined 0.2 percent. The food index rose 0.3 percent in May, slightly less than in April. The index for all items less food and energy advanced 0.1 percent in May, following a 0.2 percent rise in April. Smaller increases in the indexes for shelter and medical care were responsible for the moderation.

From Bloomberg:

A measure of consumer prices in the U.S. rose less than forecast in May, bearing out the Federal Reserve's view that broader inflation pressures would moderate as the economy cooled.

So-called core prices, which exclude food and fuel, rose 0.1 percent last month after a 0.2 percent gain in April, the Labor Department said today in Washington. The median estimate of economists surveyed forecast a 0.2 percent gain. All prices rose 0.7 percent, the biggest increase since September 2005, led by a jump in gasoline costs.

The report may alleviate Fed concerns that rising energy and food costs would translate into broader price gains. Smaller gains in core prices may eventually give Fed Chairman Ben S. Bernanke the option to lower interest rates should the economy falter.

``We've seen a gradual diminution in core inflation,'' William Cheney, chief economist at John Hancock Financial Services in Boston, said before the report. ``If everything plays out right according to the Fed playbook, they'll be on hold well into next year and then they'll start to ease a little.''

From CBS Marketwatch:

Higher energy prices drove the consumer price index up by 0.7% in May, its largest increase since Hurricane Katrina and the second largest in 16 years, the Labor Department reported Friday.

But while consumer inflation was scorching hot, the core rate of inflation - which excludes food and energy costs - rose just 0.1%.

Core inflation has thus risen at 2.2% in the past 12 months, the smallest gain in more than a year and close to the Federal Reserve's target range. Core inflation has risen at just 1.6% annualized in the past three months.

The 0.7% gain on the headline CPI was just as expected by economists. But the 0.1% increase was less than the 0.2% anticipated by economists surveyed by MarketWatch.

So consumers saw the second-biggest increase in prices in 16 years, or since Hurricane Katrina. But that really doesn't matter too much from a policy perspective because the core rate was OK. Not that anybody consumers food or energy or anything related to that....

Seriously, the markets should like this report a great deal. There has been a lot of concern about inflation this week which was caused by the sell-off in the Treasury market. Now it appears that core inflation is still slowing as the Federal Reserve predicted. This implies the Fed is still on hold regarding interest rate policy, which makes everyone happy.