U.S. Consumer Price Slumber Clouds Rate Picture

U.S. consumer prices are rising at the slowest pace in half a year, a complication for the Federal Reserve as it balances soft inflation readings against signs the labor market is at or near full employment.

The consumer-price index, which measures what Americans pay for everything from dog food to doctors' visits, declined a seasonally adjusted 0.1% in May from the prior month, the Labor Department said Wednesday. Excluding the often-volatile categories of food and energy, so-called core prices rose only 0.1% from April.

From a year earlier, consumer prices rose 1.9%, the third straight month annual gains have eased and the lowest reading since November. Prices were up 1.7% on the year when excluding food and energy, the weakest mark in two years.

Fed officials have dismissed low inflation readings as "transitory," a description that may now be more difficult to maintain.

"The softness in inflation looks more than temporary," Mickey Levy, economist at Berenberg Capital Markets, said in a note to clients.

The report is the Fed's last peek at inflation before officials conclude a two-day policy meeting Wednesday afternoon. The central bank is expected to raise short-term interest rates in response to steady job creation and low unemployment.

While the labor market appears strong -- the unemployment rate hit a 16-year low in May -- inflation has softened.

The Fed's preferred gauge, the price index for personal-consumption expenditures, poked above the central bank's 2% target in February but settled down to 1.7% in April, the most recent month for which data is available.

The Fed is tasked with maintaining full employment and stable prices. If the 2% target for inflation remains elusive, Fed officials may have to rethink the future path for interest rates.

"If this slowing trend in inflation continues, it may also slow the future pace of Fed tightening," said David Berson, chief economist at Nationwide.

The consumer-price index tends to run a little bit higher than the personal consumption index, reflecting different methods for calculating inflation. Both gauges have followed the same pattern, with price gains peaking in February and then easing.

In the May CPI report, gasoline was the main culprit behind falling prices. The gasoline index decreased 6.4% from April but was up 5.8% from a year earlier. Food prices climbed 0.2% last month and were up 0.9% from a year earlier.

Shelter costs -- which account for about a third of the overall price index -- increased 0.2% on the month and rose 3.3% on the year.

Elsewhere, inflation was weak. Monthly prices fell for apparel, airfare, communication and medical care services, the Labor Department said.

Economists surveyed by The Wall Street Journal had expected overall prices to hold steady and core prices to rise 0.2% on the month.

A separate Labor Department report showed average weekly earnings for private-sector workers, adjusted for inflation, increased 0.3% in May from the prior month. From a year earlier, inflation-adjusted weekly earnings were up 0.6%.

Write to Jeffrey Sparshott at jeffrey.sparshott@wsj.com

(END) Dow Jones Newswires

June 14, 2017 12:40 ET (16:40 GMT)