Inflation Watch: Headline CPI Plunges Below Two Percent

The Bureau of Labor Statistics released the CPI data for last month this morning. Year-over-year Headline CPI came in at 1.70%, down dramatically from 2.30% last month. Year-over year-Core CPI came in at 2.26%, which the BLS rounds to 2.3%, down fractionally from 2.31% last month.
 
Here is the introduction from the BLS summary:
 
The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.3 percent in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.

The gasoline index declined 6.8 percent in May, leading to a sharp decrease in the energy index and the decline in the all items index. The indexes for natural gas and fuel oil declined as well, though the electricity index increased. The food index was unchanged, with a slight decline in the index for food at home offsetting an increase in the food away from home index.

The index for all items less food and energy rose 0.2 percent in May, the third consecutive such increase. The indexes contributing to the increase were largely the same ones as in April: shelter, medical care, used cars and trucks, apparel, airline fares, and new vehicles. The indexes for household furnishings and operations and for tobacco declined.

The 12-month change in the index for all items was 1.7 percent in May; this figure has been declining steadily since its 3.9 percent recent peak in September 2011. The decline has been driven mostly by the energy index, which decreased 3.9 percent over the last 12 months. This was its first 12-month decline since October 2009. The 12-month change in the food index, which was 4.7 percent as recently as December, fell to 2.8 percent in May. The 12-month change in the index for all items less food and energy was 2.3 percent in May, the same figure as in April and March. More...
 
The Briefing.com month-over-month consensus forecast was -0.2% for Headline (versus -0.3% actual) and 0.1% Core (versus 0.2% actual).
 
The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.

On the next chart I've highlighted the 2% level, which is generally understood to be the Fed's target for core inflation. Here we see more easily see the widening spread between headline and core CPI since late 2010, a pattern that began changing last October as headline inflation declined while core continued to rise, although it has lately started flattening out.

Federal Reserve policy, which focuses on core inflation, and especially the core Personal Consumption Expenditures (PCE), will see that the latest core CPI is fractionally above the target range, even though the more volatile headline inflation has fallen below two percent.