By Chris Cermak

WASHINGTON (MNI) – Consumer prices in the U.S. likely stalled in
May, brought on by weaker commodity prices that could ease some pressure
on the Federal Reserve to start tightening monetary policy.

May producer prices released Tuesday offered the first glimpse.
Headline PPI rose 0.2%, the smallest increase since July, on the back of
a sharp drop in food prices and lower energy costs.

Headline CPI for May, due out Wednesday, is projected to be flat
for the first time since June of last year, according to economists
surveyed by Market News International.

The weaker headline numbers could signal the beginning of the end
of a food and energy price surge that has reduced consumers’ purchasing
power over the last few months. Retail gasoline prices appeared to peak,
at least for now, at $3.965 in the week of May 9, according to the
Energy Information Administration.

Food prices plunged 1.4% in the May PPI, the sharpest drop since
June of last year, while energy rose 1.5%, the smallest gain since
September and down from 2.5% last month.

Jonathan Basile, an economist with Credit Suisse, says lower
commodities could push the headline numbers into negative territory
going forward.

“That’s more of a June story,” Basile told MNI in an interview.
“The gains (in May) are not as great. The June story is we might see an
outright decline.”

The dollar also strengthened against the euro and other currencies
in May, pushing down the costs of imports. Petroleum import prices fell
0.4% and food imports dropped 0.5%, according to May figures released
last week.

Core CPI, which excludes food and energy, is expected to remain
relatively steady with a 0.1% rise in May, according to the MNI survey.
Core PPI rose 0.2% during the month.

But Basile predicts there could be a noticeable increase coming
from rising auto prices, the result of supply shortages brought on by
the Japanese earthquake.

“The whole auto complex … are getting a boost over this period
because of these model shortages,” Basile says.

Some more hawkish Fed officials had cited the recent uptick in
headline inflation as a reason to start pulling back from the central
bank’s easy monetary policy, as its second round of quantitative easing
comes to an end this month.

A weaker inflation report for May could bolster the case of Fed
Chairman Ben Bernanke and the Fed’s senior officials, who believe the
Fed’s monetary policy remains appropriate, voiced concerns about the
weak pace of the economic recovery and have said the rising inflation
was “transitory.”

“Inflation has drifted up earlier in the year, but has come down in
recent weeks,” New York Fed President Bill Dudley said last week.

Assuming the rapid buildup in commodities has ended, Dudley said he
“would expect headline inflation to decline to a level closer to our
longer-run objectives.”

CPI will be released 8:30 a.m. ET Wednesday by the Labor
Department.

— Chris Cermak is a Washington reporter with Need to Know News

** Market News International Washington Bureau: 202-371-2121 **

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