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Inflation felt by consumers last month was worse than economists had predicted, and financial markets are now fully pricing in another rate hike when the

Federal Reserve

meets later this month.

On a seasonally adjusted basis, the consumer price index rose 0.4% in May, following a 0.6% increase in April. The core CPI, which excludes food and energy prices, advanced 0.3%, the Labor Department said Wednesday.

The headline number was in line with most economists' estimates, but the core rate was only expected to increase 0.2%. When compared with May 2005, the jump in consumer prices was even more pronounced, at 4.2% on the overall CPI and 2.4% for the core rate.

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Index futures for the major U.S. stock averages sank following the report.

S&P 500

futures went from trading 4.5 points above fair value to a point below. Futures on the Nasdaq 100 had been pointing to a 5-point gain for technology stocks, but after the CPI data, dropped to indicate a flat open.

Stocks and lately commodities have paid a heavy price as investors fret that rising rates will cool the economy too much. The Fed has lifted rates at 16 straight meetings going back to June 2004, and now another quarter-point hike, taking rates to 5.25%, is uniformly expected.

The CPI report comes a day after the government's measure of wholesale inflation, the producer price index, showed less inflation pressure than had been feared. However, the core rate did rise more than expected.

Wholesale prices rose 0.2% in May, compared with economists' consensus estimate for a gain of 0.4%. Taking out food and energy prices, the core PPI climbed 0.3% in May, faster than the 0.2% rate that had been forecast.