Those inflation hawks you've seen flying above are heading back to their nests. That's because inflation remained tame in May, with producer prices rising a scant 0.2 percent, the U.S. Labor Department announced Tuesday.

Meanwhile, the core rate, which excludes the often-volatile food and energy components, actually fell 0.1 percent, indicating that the bulk of what little inflation that exists in the economy is energy based.

May's energy price data bears that out: energy prices rose 2.9 percent in May, with gasoline prices leading the way. U.S. motorists can certainly attest to that: average U.S. gasoline prices have increased more than 55 percent in six months, including a whopping 13.9 percent surge in May alone.
Economists surveyed by Bloomberg News had expected May producers prices to increase 0.7 percent and the core rate to increase 0.1 percent. Producer prices rose 0.3 percent in April, fell 1.2 percent in March, and rose 0.1 percent in February.

Producer prices have now fallen five percent in the past 12 months – the largest year-over-year price decline in PPI since 1949. However, the core rate has increased three percent over the past year.

Further, those investors and inflation hawks who were expecting the U.S. Federal Reserve to start increasing short-term interest rates -- despite the fact that the U.S. economy is only four months into its stimulus program -- due to concerns about inflation, are seeing a rate increase that's not in the cards, for now, so says DRW Trading Group Strategist Lou Brien.

"That was somewhat of a mistaken signal," Brien told Bloomberg News Tuesday. "The market was again anticipating something that at the earliest would occur only next year. They were getting ahead of the game."

Business executives, economists, and in particular Fed officials closely monitor the producer price index because it provides an early-stage warning regarding inflation. Fed officials pay especially close attention to the core-PPI statistic to gauge core business costs.

Also in May, finished energy goods increased 2.9 percent, diesel prices increased 4.5 percent, and crude oil added 3.6 percent. Meanwhile, consumer goods declined 1.6 percent, vegetables plunged 20.9 percent, and foodstuffs and feeds increased 0.4 percent.

Economic Analysis: A better-than-expected May producer price report and overall inflation remains under control. True, core prices have risen three percent in the past year, but the Fed will likely evaluate that stat in context with the five percent decline in overall producer prices. Much of the PPI inflation is energy-based, which suggests there is little pricing power in the economy. Hence the bias -- or biggest worry for the Fed -- remains deflation over the next year, not inflation.

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