US Inflation Hits 4.2%, Core CPI Slowdown Offers Fed Relief

US headline inflation hit 4.2% in May, matching expectations and reaching the highest level in three years. The energy shock continued to push up prices. Core CPI, which excludes food and energy, edged up to 2.9% from 2.8% a year earlier. Monthly core inflation slowed to 0.2%, below the 0.3% economists had predicted.

Energy remained the main driver. The energy index surged 23.5% year over year and rose 3.9% month on month in May. That followed gains of 10.9% in March and 3.8% in April. The Bureau of Labor Statistics said energy accounted for more than 60% of the monthly increase in headline CPI. Food prices rose 3.1% year over year.

For the Federal Reserve, the report is a mixed signal. The headline jump reinforces concerns that higher energy costs are feeding into the broader economy. The softer monthly core reading suggests underlying price pressures are not accelerating. That gives the Fed space to keep rates unchanged at its next meeting. The policy rate currently sits at 1.75% to 2.0%.

Market reaction was muted. Traders saw the print as largely in line with expectations, leaving the rate path unchanged. The next significant inflation data point is the PCE report due later this month. The Fed meets again in July. Markets are pricing in no change to the federal funds rate.