U.S. Inflation Cools as Fed Plots Next Interest Rate Move

Investors have been betting that Fed officials will leave rates unchanged at their meeting this week — and their conviction that policymakers will skip a move this meeting deepened after Tuesday’s report, helping to extend the recent rally in stocks. Yet the details in the data underscored that wrestling inflation the whole way back to normal could prove challenging, so investors continued to expect that Fed officials will raise rates again in July.

“It’s a fine report,” said Sarah Watt House, senior economist at Wells Fargo. “But I still think it keeps the Fed on edge.”

Inflation is proving stubborn in a few key categories. Fed officials closely monitor month-to-month changes in prices, particularly for a so-called core index that strips out volatile food and fuel costs to get a sense of the recent trends in inflation. That figure continued to pick up at an unusually quick pace in May, slightly above what economists had expected.

Several service categories continued to climb quickly in price, from car insurance to moving expenses and hotel rates. Price increases for goods excluding motor vehicles also remained positive, instead of subtracting from inflation as some economists have been expecting.

“It’s possible firms have gotten used to raising prices,” said Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives.

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