Inflation has further to fall

Headline CPI inflation dropped below the Fed's 2% target rate in May for the first time in 16 months and, with gasoline prices still falling, it looks like it could be down to around 1.5% within another few months. Stripping out food and energy, core inflation remains slightly above the Fed's target, but we expect it to drop back as well, albeit more gradually. The moderation in the growth of unit labour costs, the dollar's recent appreciation and the decline in a wide range of commodity prices all point to a slowdown in underlying consumer price inflation.