US inflation slowed in May, supporting the case for Federal Reserve officials to pause their run of interest-rate hikes this week.

Both the consumer price index and the core CPI — which excludes food and energy — decelerated on an annual basis, highlighting inflation’s descent since peaking last year. At 4%, year-over-year inflation is now at its lowest level since March 2021, according to data out Tuesday from the Bureau of Labor Statistics.

That said, a key gauge of prices closely watched by the Fed continued to rise at a concerning pace. The core CPI rose 0.4% for a third straight month, in line with estimates. The overall CPI, however, increased a smaller 0.1%, aided by lower gasoline prices.

Here are some of the top-line figures in the report:

The inflation figures come just a day before the Fed is set to make a decision on whether to raise interest rates for an 11th-straight meeting or to pause and further assess economic conditions.

Several policymakers, including Chair Jerome Powell, have signaled they prefer to skip a rate hike at the June 13-14 meeting, while still leaving the door open to future tightening if needed. Economists generally agree the central bank will leave rates unchanged Wednesday, but the next CPI report due in July will play a key role in determining what the Fed will do at that month’s meeting.

“This is a pretty good print in terms of signaling that we are likely to see the core CPI soften materially starting next month,” Omair Sharif, president of Inflation Insights LLC, said in a note. “The way things are going now, I suspect we’ll see a soft core that will tamp down odds of a July hike.”

The S&P 500 rose and Treasury yields fluctuated as traders pondered the Fed’s course of action.

The details showed shelter, used cars and motor vehicle insurance all contributed to the monthly advance. Meantime, airfares and household furnishings declined. That said, with prices for many goods and services still higher than they were a year ago, households’ budgets continue to be squeezed by inflation.

Read More: Egg Prices Drop the Most in 72 Years, Helping Slow US Inflation

Excluding housing and energy, service prices climbed 0.2% from a month earlier, according to Bloomberg calculations, which is more consistent with pre-pandemic trends. The metric was up 4.6% from a year earlier, extending a decline since peaking late last year.

While Powell and his colleagues have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, they compute it based on a separate index. The two gauges can diverge significantly, like in April when the CPI-based figure softened to a nine-month low whereas the other — based on the personal consumption expenditures price index — accelerated. The May PCE price index will be released later this month.

What Bloomberg Economics Says...

“May’s CPI print will give the Fed space to skip a hike in June — but the slow progress in reducing core inflation highlights how unlikely it is that the Fed will cut rates this year.”

— Anna Wong and Jonathan Church, economists

To read the full note, click here

Shelter costs, which are the biggest services component and make up about a third of the overall CPI index, reaccelerated to 0.6%. That was bolstered by an increase in the cost of hotel stays and still-elevated rents.

The gasoline price index fell 5.6%. Grocery prices edged higher after falling for two straight months, while dining out got more expensive.

Much of the pullback in the CPI from its 40-year high last June has been driven by disinflation, if not outright deflation, in merchandise categories — a function of normalizing supply chains and a broader shift in consumer preferences toward services.

But that trend has reversed somewhat in recent months. So-called core goods prices, which exclude food and energy commodities, rose 0.6% for a second month.

How far the Fed can push the economy without spurring a recession is unclear, especially since the current data offer a mixed report.

Read more: Understanding the Four P’s That Explain the Puzzling US Economy

Wage gains also differ depending on the metric. According to a separate report out Tuesday, real average hourly earnings rose 0.3% in May, the strongest this year. They were up 0.2% from a year ago, the first positive reading in over two years. Fed officials are rethinking their view that wage gains are fueling inflation, which could further bolster the case for a pause this week.

The outlook for interest rates remains hazy, but new data should help Fed officials with their decision. Between now and the central bank’s July meeting, policymakers will have access to a range of fresh figures on consumer spending, hiring, PCE inflation and another CPI report.

--With assistance from Jordan Yadoo, Matthew Boesler and Sophie Caronello.

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