U.S.: Inflation Still Low

The May data for inflation showed a slower increase than expected. At 1.4% y/y, inflation is still low. Excluding the most volatile items, consumer prices are a on a clear decelerating trend. With sluggish demand and still large excess capacities, inflation pressure should remain low for a while.

• Consumer prices rose less than expected in May, up 0.1% m/m against 0.2% expected. Food prices were down 0.1% m/m, the first decrease since September 2009. Consumer prices increased only 1.4% from last year.
• Import prices were down by 1.9% y/y and by 0.5% excluding petroleum products. Producer price for finished goods rose sharply, from 0.7% y/y in April to 1.8% y/y in May, but excluding food and energy, the pace of increase moderated slightly, from 1.7% y/y to 1.6% y/y.
• The recent deceleration in core inflation is still at work. The index for non-food non-energy consumer prices has been decelerating from 2.1% in 2012 and 1.9% in Q1 2013 to 1.7% in April and May. Using a narrower measure (excluding fruit, vegetables, gasoline, fuel oil, natural gas, homeowner equivalent rent of primary residence, intercity transportation and tobacco products, following the preferred measure of the Bank of Canada), the trend is even more pronounced. This “augmented”-core CPI was up by a limited 0.6% y/y in May, following 1.0% in Q1 2013 and 1.7% in 2012. This is the slowest pace of growth since end-2010.
• Low inflation reflects the constraints that prevent companies from rising prices, such as slowing emerging markets, recession in the euro area and moderate wage gains. In addition, excess capacities are still important as suggested by the large output gap, meaning that inflation could remain subdued for a while.
• All in all, May price indices confirm the absence of inflationary pressure in the U.S. Recent improvements in the labour market are not sufficient to trigger acceleration in wages. Considering the natural level of the unemployment rate is between 5.2% and 6%, there is still a long way to go to before employment growth translates into inflation pressure.