Inflation rose at a 4 percent annual rate in May, the smallest increase in 2 years and a sign that while the overall cost of goods and services continues to increase, the pace of the increase may be slowing down.

The consumer price index, which measures changes in a broad spectrum of prices from food and cars to gas and rent, increased 0.1 percent for the month, reflecting an annual level of 4 percent, down from 4.9 percent in April. The May CPI saw the smallest 12-month increase since March 2021, when inflation was just beginning to rise.

The annual CPI peaked at 9.1 percent in June 2022, which was the biggest increase since November 1981, and now the rate of rising prices appears to be subsiding as the large price increases of 2022 drop out of the calculation.

Slowdown attributed to food and energy costs

Overall inflation declines are credited to the price of energy and food, according to data released Wednesday by the Bureau of Labor Statistics. The energy index fell 3.6 percent in May and commodity prices fell 0.2 percent in May after rising 0.6 percent in April, falling back to levels seen before Russia’s invasion of Ukraine in February 2022.

The energy index decreased 11.7 percent for the 12 months ending May, and the food index increased 6.7 percent over the last year.

Shelter was the largest contributor to the monthly inflation increase, followed by used cars and trucks. Inflation persists in other categories such as auto insurance, apparel, and personal care, and remains well above the Fed’s 2 percent target.

Markets bet Fed will not raise rates

This is the 11th consecutive month that this inflation measure has cooled, Labor Department data show. Economists were expecting a month-on-month inflation declines of 0.1 percent, according to Refinitiv estimates. Instead, prices fell 0.3 percent. 

The data “should cement expectations for the Fed to keep rates unchanged (in June) but the commentary around the decision is likely to remain hawkish,” said James Knightley, chief international economist at ING.

The inflation declines will likely take pressure off the Federal Reserve to continue raising interest rates, MSNBC reported. However, the inflation rate is far higher than the Fed’s 2 percent target rate, suggesting that the Fed’s battle against inflation will continue.

Wall Street expects the Fed to skip a rate hike in June with a 63 percent chance of a quarter-point hike in July, CNN reported. If it skips June, this would be the Fed’s first pause after ordering 10 consecutive rate hikes.

Stocks rise as inflation declines

Stocks rallied last week bas a debt ceiling crisis was averted in time to avoid a default, and hit 14-month highs Tuesday. The S&P 500 Index was up 20 percent from its October low, pushing it into a bull market. The tech-heavy Nasdaq Composite Index saw its longest run of weekly gains since November 2019, thanks to Big Tech stocks.

Markets were pricing in a 93 percent probability that the Fed would hold off on raising interest rates at the June 14 monetary policy meeting, according to Refinitiv data based on interest rate derivatives prices, Financial Times reported.

“The consensus view is that inflation is on a path lower, the economy is slowing but not contracting, and the Fed will chill and reassess in July,” said Mike Zigmont, head of trading and research at Harvest Volatility.