May’s Consumer Price Index (CPI) fell -0.1%, dropping the yearly CPI to +1.9% from April’s +2.2% yearly rate, but still remaining higher than the +1.6% 10-year average. Core CPI, which does not include food or energy components, was up +0.1% for the month, and +1.7% for the year, but down from April’s +1.9% yearly rate. Prices dropped significantly for gasoline (-6.4%), and to lesser extents for airline fares (-2.7%), apparel (-0.8%), and fruits and vegetables (-0.6%).

Despite the recent declines in inflation, medium term inflation estimates remain at the Federal Open Market Committee’s (FOMC) 2% target, and while job gains have moderated, they are “solid, on average”, prompting the FOMC to raise the federal funds rate by +0.25% to a 1.00% - 1.25% target range. Economic projections from the meeting forecast that 2017’s GDP would come in at 2.2%, unemployment at 4.3%, and core PCE at 1.7% - if these projections hold up, the FOMC plans one additional rate increase for 2017.

April’s monthly increase in industrial production was the highest monthly gain since May 2010, and was revised +0.1% upward to a +1.1% increase. However, May’s production was unchanged from April, falling short of an expected +0.1% gain, and capacity use fell -0.1% to 76.6%, which is -2.9% below its long term average. Gains in mining (+1.6%) and utilities (+0.4%) offset a decrease in manufacturing (-0.4%), with half the manufacturing drop due to a -2.0% drop in auto and auto parts manufacturing.