• Core CPI surprised to the downside at 0.1% M/M, bringing the Y/Y figure down to 2.2%
• In contrast, all-items CPI came in above expectations at 0.7% M/M, and 2.7% Y/Y

This morning’s core CPI number came in below expectations at 0.1% M/M, while the all-items figure came in above expectations at 0.7%, largely on the strength of gasoline prices. Core CPI wasn’t quite as weak as it seemed though, since the M/M number was, more specifically, 0.149%, which is as big as they come for a 0.1 result. As a result, the 3-month annualized trend in core CPI is now down to only 1.6%, after reaching 2.6% as recently as February.

The details of the report didn’t bring anything all that shocking. Owner’s Equivalent Rent (OER) continued on its downward trend, posting only 0.1% M/M in May, which is its lowest monthly reading since June 2005. (And, if you want to get picky, to two decimal places it’s actually the lowest reading since June 2003, at only 0.08%.) As a result, OER is now sitting at only 3.5% Y/Y, after peaking at 4.3% in the November 2006 – January 2007 period. We expect OER to continue moving lower as the housing market continues to work through its correction.

We don’t think that this morning’s CPI report should elicit a strong market reaction, since most market participants are not calling for Fed rate cuts any time soon. We agree with that sentiment, and expect the Federal Reserve to remain on hold through the foreseeable future.

Jacqui Douglas
Economics Strategist
TD Securities