The CPI rose 0.1 percent in May after rising 0.4 percent in April, slightly below Econoday's consensus forecast of 0.2 percent. The 12-month rate came in at 4.0 percent, below the 4.1 percent consensus, and marking a sharp slowdown from 4.9 percent in April. The core index, excluding food and energy, showed less sign of easing on the month, as it remained at 0.4 percent, while the year-over-year inflation rate softened to 5.3 percent from 5.5 percent, both as expected.

Food prices were up 0.2 percent on the month and 6.7 percent on the year, while energy fell 3.6 percent from April and 11.7 percent from May 2022.

Shelter, which was up 0.6 percent on the month after 0.4 percent in April, was the largest contributor to the monthly gain. The index was up 8.0 percent from a year earlier. Rent of shelter was up 0.5 percent on the month and 8.2 percent year-over-year. Services less rent of shelter (a proxy for non-housing services prices which the Fed is watching) fell 0.2 percent on the month and increased 4.2 percent year-over-year in May, down from April's 5.2 percent.

Used cars and trucks also boosted the monthly CPI, with a 4.4 percent monthly advance. However, the index was down 4.2 percent year-over-year. Motor vehicle insurance, apparel, and personal care also contributed to higher prices from the previous month. On the downside, airline fares decreased as well as household furnishings and operations.

The Federal Reserve will welcome the substantial decline in the headline inflation rate to 4.0 percent, the lowest level since March 2021, as well as the lower core index now at 5.3 percent, the lowest since November 2021.

The relief comes just a day before a highly uncertain outcome for the FOMC meeting amid still high inflation rates despite today's data showing some softening combined with uncertainty about the economic outlook. The central bank also has to weigh the CPI data against a stronger-than-expected May employment report.

Core prices in May are not expected to slow at least on the month, seen holding steady instead at April's elevated 0.4 percent monthly increase. But the core's year-over-year rate is seen easing, to 5.3 from 5.5 percent. Overall prices are also expected to ease and substantially, to 0.2 percent on the month from 0.4 percent and to 4.1 percent on the year from 4.9 percent.

The CPI is a measure of the change in the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation for the consumer. Annual inflation is also closely watched.

The consumer price index is available nationally by expenditure category and by commodity and service group for all urban consumers (CPI-U) and wage earners (CPI-W). All urban consumers are a more inclusive group. The CPI-U is the more widely quoted of the two, although cost-of-living contracts for unions and Social Security benefits are usually tied to the CPI-W, because it has a longer history. Monthly variations between the two are slight.

The CPI is also available by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for many metropolitan areas. The regional and city CPIs are often used in local contracts.

The Bureau of Labor Statistics also produces a chain-weighted index called the Chained CPI. This measures a variable basket of goods and services whereas the regular CPI-U and CPI-W measure a fixed basket of goods and services. The Chained CPI is similar to the personal consumption expenditure price index that is closely monitored by the Federal Reserve Board.

The consumer price index is the most widely followed monthly indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets- and your investments.

If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation as you know the $100 will not be able to buy the same amount of goods and services a year from now. The CPI tells us that prices rose 4.2 percent in the U.S. over 2007. To recoup your purchasing power, you would have to charge 4.2 percent interest. You might want to add one or two percentage points to cover default and other risks, but inflation remains the key factor behind the interest rate you charge.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.