Consumer prices fell 0.1 percent in May, the first decline in 10 months, as energy prices retreated after a big run-up in the previous three months.
The Labor Department reported Wednesday that the decline in its closely watched Consumer Price Index followed big gains of 0.4 percent in February, 0.6 percent in March and 0.5 percent in April. Those increases had been driven by a surge in energy costs this year as crude oil prices hit all-time highs in early April.
Analysts had expected inflation would moderate in May, given recent declines in energy prices, but the outright drop came as a surprise. They had been forecasting a small 0.1 percent increase. Outside of food and energy, inflation remained well contained as well with a modest increase of just 0.1 percent.
Meanwhile, another government report showed that production at the nation’s factories, mines and utilities rose a solid 0.4 percent in May, reversing a 0.3 percent decline in April. The increase reflected a big 0.6 percent jump in output in manufacturing as auto production stopped falling and other sectors actually posted increases.
Output at the nation’s mines, a category that includes oil production, rose by 0.1 percent while production at utility plants fell by 0.7 percent after an even bigger 2.4 percent decline in April.
The 0.4 percent overall gain in industrial production was double the 0.2 percent increase that economists had been expecting. It left U.S. industry operating at 79.4 percent of capacity in May, up from an operating rate of 79.1 percent in April.
The moderation in inflation pressures in May helped boost the incomes of American workers. Weekly earnings of nonsupervisory workers after adjusting for inflation rose by 0.3 percent in May compared to April. That gain followed three straight monthly declines. However, workers’ weekly pay is 0.3 percent lower than it was a year ago.
In other economic news, the Commerce Department reported that business inventories held on shelves and backlots rose by 0.3 percent, a slowdown from the gains of the previous several months. Analysts are looking for inventory building, which added significantly to economic growth in the first quarter, to slow in the current quarter.
So far this year, inflation has been rising at an annual rate of 3.7 percent, up slightly from the 3.3 percent increase for all of 2004. Outside of food and energy, core inflation is up 2.4 percent at an annual rate so far this year, only slightly higher than last year’s 2.2 percent increase.
The Federal Reserve has raised interest rates eight times in the past year in an effort to moderate economic growth enough to make sure that a rebounding economy does not trigger unwanted inflation.
The Fed is expected to boost rates for a ninth time when policy-makers next meet at the end of this month, but analysts are expecting it will be another quarter-point increase given that inflation pressures seem to be moderating.
The 0.1 percent drop in consumer prices for May was the first decline since a similar 0.1 percent decline in July 2004, a decrease that also reflected a big drop in energy costs.
In May, energy prices fell by 2 percent, led by a 4.4 percent plunge in gasoline pump prices, the biggest decrease since a 5 percent plunge in July 2004.
Food prices also moderated last month with a tiny 0.1 percent increase following a 0.6 percent surge in April. Pork and poultry prices actually fell during the month.
Outside of food and energy, clothing costs were unchanged after having fallen by 0.6 percent in April.
New car costs edged up a slight 0.1 percent while airline ticket prices shot up 2.2 percent.