A closely-watched report on US inflation showed consumer price increases cooled during the month of May, according to the latest data from the Bureau of Labor Statistics released Wednesday morning.

The Consumer Price Index (CPI) remained flat over the previous month and rose 3.3% over the prior year in May — a deceleration from April’s 0.3% month-over-month increase and 3.4% annual gain in prices. Both measures beat economist expectations.

A decline in energy prices, led by a drop in gas prices, contributed to further downward pressure on headline CPI.

On a “core” basis, which strips out the more volatile costs of food and gas, prices in May climbed 0.2% over the prior month and 3.4% over last year — cooler than April’s data. Both measures also came in ahead of economist estimates.

Markets rose on the heels of the report, with the 10-year Treasury yield (^TNX) falling about 12 basis points to trade around 4.29%. The inflation report arrives just ahead of the central bank’s policy decision at 2 p.m. ET.

Inflation has remained stubbornly above the Federal Reserve’s 2% target on an annual basis. And even though this CPI report won’t have an outsized effect on the looming Fed decision, the timing has perhaps added even more spectacle around its release.

Fed officials have categorized the path down to 2% as “bumpy,” while other recent economic data has fueled the Fed’s higher-for-longer narrative on the path of interest rates.

On Friday, the Bureau of Labor Statistics showed the labor market added 272,000 nonfarm payroll jobs last month, significantly more additions than the 180,000 expected by economists. Wages also came in ahead of estimates at 4.1%, although the unemployment rate rose slightly to 4% from 3.9%.

Notably, the Fed’s preferred inflation gauge, the so-called core PCE price index, has remained particularly sticky. The year-over-year change in core PCE, closely watched by the Fed, held steady at 2.8% for the month of April, matching March.

Investors now anticipate a range of one to two 25-basis-point cuts in 2024, down from the six cuts expected at the start of the year, according to Bloomberg data.

Following the data’s release, markets were pricing in a roughly 69% chance the Federal Reserve begins to cut rates at its September meeting, according to data from the CME FedWatch Tool. That’s up from about a 53% chance the day prior.

Shelter prices remain sticky, energy index falls

Notable call-outs from the inflation print include the shelter index, which rose 5.4% on an unadjusted, annual basis, a slight slowdown from April. The index rose 0.4% month over month and was the largest factor in the monthly increase in core prices, according to the BLS.

Story continues

Sticky shelter inflation is largely to blame for higher core inflation readings, according to economists.

The index for rent and owners’ equivalent rent (OER) each rose 0.4% on a monthly basis, matching April’s rise. Owners’ equivalent rent is the hypothetical rent a homeowner would pay for the same property.

Lodging away from home decreased 0.1% in May after falling 0.2% in April.

Energy prices fell in May, driven by a significant drop in gas prices. The index declined 2% over the prior month after rising 1.1% in April. On a yearly basis, the index climbed 3.7%.

Gas prices fell 3.6% from April to May after rising 2.8% the previous month.

The food index increased 2.1% in May over the last year, with food prices rising 0.1% from April to May. The index for food at home came in flat over the month while food away from home rose 0.4%.

Other indexes that increased in April included medical care, used cars and trucks, and education.

The indexes for airline fares, new vehicles, communication, recreation, and apparel were among those that decreased over the month, according to the BLS.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance