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Tame Inflation Data Further Fuels Rate Cut Expectations

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A closely watched report released by the Labor Department on Wednesday showed a modest increase in U.S. consumer prices in the month of May.

The report also showed a slowdown in the annual rate of consumer price growth, further fueling expectations that the Federal Reserve will cut interest rates in the near future.

The Labor Department said its consumer price index inched up by 0.1 percent in May after rising by 0.3 percent in April. The uptick in prices matched economist estimates.

A rebound in food prices accounted for nearly half of the increase by the index, with food prices climbing by 0.3 percent in May after edging down by 0.1 percent in April.

On the other hand, the report said energy prices fell by 0.6 percent in May after spiking by 2.9 percent in April amid a pullback in gasoline prices.

Excluding food and energy prices, core consumer prices also edged up by 0.1 percent for the fourth consecutive month. Economists had expected core prices to rise by 0.2 percent.

Higher prices for shelter, medical care, airline fares, education, household furnishings and operations, and new vehicles were partly offset by lower prices for used cars and trucks, recreation, and motor vehicle insurance.

As mentioned above, the report also showed a slowdown in the annual rate of consumer price growth, with the headline index up by 1.8 percent year-over-year in May compared to the 2.0 percent increase in April.

The annual rate of core consumer price growth also slowed to 2.0 percent in May from 2.1 percent in the previous month.

"Tariff changes may eventually push up some goods prices, while apparel prices should soon rebound," said ING Chief International Economist James Knightley. "But for now, inflation pressures in aggregate remain benign."

He added, "As such, financial markets will see little reason for the Federal Reserve to hold back from rate cuts in coming months to combat the perceived threat of a slowdown caused by intensifying trade tensions."

Knightley expects the Fed to use next week's monetary policy meeting to signal an "easing bias," potentially by repeating Fed Chairman Jerome's Powell use of the "closely monitoring" phrase and downwardly revising its projections for the economy and interest rates.

"While we doubt that the Fed will carry through with the 100 basis points or so of policy easing currently priced by markets, the longer trade tensions drag on, the greater the chance the Fed will be forced to respond aggressively," Knightley said.

On Tuesday, the Labor Department released a separate report showing a modest increase in U.S. producer prices in the month of May.

The Labor Department said its producer price index for final demand inched up by 0.2 percent in May after rising by 0.2 percent in April. The uptick in prices matched economist estimates.

The slight increase in producer prices came as higher prices for services were partly offset by a sharp pullback in energy prices.

Core producer prices rose by 0.2 percent in May after edging up by 0.1 percent in April. The increase in core prices also met expectations.

The report also said the annual rate of growth in producer prices slowed to 1.8 percent in May from 2.2 percent in April, coming in below estimates for an increase of 2.0 percent.

The annual rate of core producer price growth also dipped to 2.3 percent in May from 2.4 percent in April, matching expectations.

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