U.S. Inflation Turned To Deflation In May, Dropping 0.1%

Jun. 14, 2017 9:27 AM ET4 Comments
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  • 12-month inflation has dipped to 1.9%, down from 2.7% in February.
  • Core inflation is up 1.7% over the last year, also in a downward trend.
  • Will the Federal Reserve back off on interest rate increases? Not likely today, but possible in the future if this trend continues.

The Consumer Price Index for All Urban Consumers decreased 0.1% in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, 'headline' inflation rose 1.9%.

The May number is significant for a couple of reasons: 1) the consensus estimate was for 0.0% inflation, so this is a downside miss, and 2) 12-month inflation has now dipped below 2.0% for the first time in six months.

The BLS noted that a 2.7% decrease in the energy index was the main contributor to the monthly fall. The cost of gasoline fell 6.2% in the month, and fuel oil prices fell 6.4%. Apparel prices also fell sharply in May, down 0.8%. Also falling were prices for new and used vehicles, both down 0.2%.

Food prices, however, rose 0.2% and are up a moderate 0.9% over the last 12 months.

Core inflation, which removes food and energy from the equation, was up 0.1% in May and rose 1.7% over the last 12 months. Year-over-year core inflation has now fallen below 2.0% for two consecutive months. Inflation is waning in mid 2017, as this chart clearly shows:

What this means for inflation-protected investments. Holders of Treasury Inflation-Protected Securities and I Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust the principal balances on TIPS and set future interest rates for I Bonds. May's inflation index was set at 244.733, up 0.09% from April.

This means that principal balances on TIPS will rise 0.09% in July. Here are the new inflation indexes for all TIPS.

The variable interest rate on I Bonds will be reset November 1, based on non-seasonally adjusted inflation from March to September 2017. So far, two months into this period, non-seasonally adjusted inflation has increased 0.38%. Here are the numbers:

This article was written by

Tipswatch profile picture
I am no longer writing for this site. More details. I will continue to post updates at my site, TipsWatch.com.-----David Enna is a long-time journalist based in Charlotte, N.C. A past recipient of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website. The Tipswatch blog, which launched in April 2011, explores ideas, benefits and cautions about U.S. Series I Bonds and Treasury Inflation-Protected Securities, which David believes are an under-appreciated and under-used investments. David has been investing in TIPS and I Bonds since 1998.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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