U.S. consumer prices rose 0.4% (month-over-month) in May, below consensus expectations for 0.5%. Core CPI (excluding food and energy) rose 0.1%, also short of the consensus call for 0.2%. On a year-over-year basis, overall consumer price inflation came out of negative territory at 0.0% (from -0.2%), while core inflation marginally decelerated to 1.7% Y/Y (previously 1.8%).



Overall, this was a relatively benign inflation report. Headline inflation (on a year-over-year basis) continues to come in subdued, largely as a result of the previous fall in energy prices. The jump on a monthly basis owes more to energy price-related volatility than anything else. But, in some ways, it is a sign of things to come. The same way the fall in energy prices contributed to 2015's lowflation environment, rising energy prices (even if modest) will lead to a sharper uptick next year.



In terms of underlying price pressures, the impact of the strong dollar continues to work its way into lower core goods prices. This may be more muted over the coming months as the trade-weighted dollar has shown more stability so far in 2015. Still, with Fed tightening in store for later this year and another leg up in the dollar expected, core goods price pressures are likely to remain subdued over the medium-term.



"Assuming the period of sharp decline in energy prices is now behind us, headline inflation will converge to its core counterpart early year. Nonetheless, even as CPI approaches 2.0% early next year, the smaller weighting of shelter costs (which has been a strong driver of CPI inflation) in PCE inflation, will keep the latter below target. Even as the Fed moves off the floor, this supports a very gradual approach to raising interest rates." says TD Economics