U.S. Consumer Price Slumber Clouds Rate Picture -- Update

U.S. consumer prices are rising at the slowest pace in half a year and consumers last month showed renewed signs of caution, potential complications for the Federal Reserve as it charts out plans for short-term interest rates through the rest of the year.

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.

For now, Fed officials don't appear overly concerned with the recent downward path, attributing it at least in part to one-time drops in prices for things like wireless telephone services and prescription drugs.

"With employment near its maximum sustainable level and the labor market continuing to strengthen, the committee still expects inflation to move up and stabilize around 2% over the next couple of years in line with our longer run objective," Fed Chairwoman Janet Yellen said Wednesday. "Nonetheless, in light of the softer recent inflation readings, the committee is monitoring inflation developments closely."

Ms. Yellen spoke at a press conference after Fed policy makers decided to raise short-term interest rates and outlined plans to start slowly shrinking its $4.5 trillion portfolio of bonds and other assets. Officials have penciled in one more increase later this year if the economy performs in line with their forecast.

Ms. Yellen's assessment of the broader economy was largely upbeat, though separate data out Wednesday showed a slowdown in key components of consumer spending.

Retail sales -- reflecting spending at stores, restaurants and websites -- fell 0.3% in May, the biggest decline since January 2016, the Commerce Department said. While that in part reflected cheaper gasoline prices, Americans also cut spending at department stores, car dealerships, electronics retailers and restaurants.

Sales are still up 3.9% this year compared with the same period in 2016, led by spending at online retailers, and Fed officials appeared to look past May's weak numbers.

"Household spending which was particularly soft earlier this year has been supported by solid fundamentals, including ongoing improvement in the job market, and relatively high levels of consumer sentiment and wealth," Ms. Yellen said.

The unemployment rate hit a 16-year low in May, underscoring steady improvement across the labor market, though wage gains have remained subdued.

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

Fed officials on Wednesday lowered their projection for inflation this year to 1.6% from 1.9%, though they still expect it to hit 2% by the end of 2018.

The Fed is tasked with maintaining full employment and stable prices.

Fed officials "are highlighting that inflation is expected to remain below the 2% target in the near term and that they expect it to rise toward that target, but if it doesn't they would adjust monetary policy in response," said Gus Faucher, chief economist at PNC Financial Services.

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.

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%.

--Josh Mitchell contributed to this article.

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

(END) Dow Jones Newswires

June 14, 2017 17:10 ET (21:10 GMT)