USA consumer prices unexpectedly fell in May as the cost of gasoline and a range other goods declined, pointing to a moderation in inflation pressures that could impact on further interest rate increases this year.
The Fed is expected to increase borrowing costs, but the signs of moderate consumer spending and retreating inflation pressures could worry policymakers who have previously viewed the softness as transitory.
Economists had been expecting inflation to remain at 2.7%.
The Labor Department said on Wednesday its Consumer Price Index dipped 0.1 percent last month after rising 0.2 percent in April. Over the past 12 months, food costs are up just 0.9 per cent while energy prices have risen 5.4 per cent.
Over the past 12 months, consumer prices are up 1.9 per cent while core inflation has risen 1.7 per cent. The Fed also laid out plans to pare back its $4 trillion balance sheet this year.
Inflation has been rising in recent months, driven by the drop in the pound since Britain voted previous year to leave the European Union.
Shelter costs - which account for about a third of the overall price index - increased 0.2% on the month and rose 3.3% on the year. The core CPI increased 1.7 percent year-on-year, the smallest rise since May 2015, after advancing 1.9 percent in April.
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Another rate hike this year is "becoming less of a sure thing as every month of data comes out", said Michael Dolega, senior economist at TD Economics.
The dollar fell to a seven-month low against a basket of currencies on the data, while prices for U.S. Treasuries rallied. US stocks were little changed ahead of the Fed's interest rate decision.
May's decline was the largest since January 2016 and confounded economists' expectations for a 0.1 percent gain.
"On the other hand, with wage growth continuing to slow and inflation still rising real pay is down on the year". While some of the drop in monthly retail sales reflected lower gasoline prices, which weighed on receipts at service stations, sales at electronics and appliance stores recorded their biggest decline since March 2010. Core inflation, which excludes energy and food, rose a slight 0.1% in May.
The overarching message the Fed sent Wednesday was an upbeat one: It believes the USA economy is on firm footing as it enters its ninth year of recovery from the Great Recession, with little risk of a recession.
The consumer-price index tends to run a little bit higher than the personal consumption index, reflecting different methods for calculating inflation. Indeed, there is a greater likelihood of the BOE expanding its quantitative easing program than raising rates, according to Allianz Global Investors' U.K. fixed-income portfolio manager Mike Riddell.
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