May CPI unexpectedly came in at -0.1%, vs an expected 0.0%. Ex-food and energy, CPI was up just 0.1% vs a consensus 0.2%. That’s the difference between an annual rate of 1.2% and an annual rate of 2.4%. Ex-food and energy, the core CPI was up only 1.7% year on year, vs an expected level of 1.9%. Retail sales meanwhile fell 0.3% in May vs an expected reading of unchanged.

A good deal of the moderation in core CPI comes from the way the Bureau of Labor Statistics calculates the cost of shelter. US home prices are still rising but much less rapidly than last year, and the lower rate of increase works its way into the CPI calculation over time.

Bonds rallied on the news, with the US 10-year Treasury yield falling to 2.15%. The 30-year bond gained a percentage point in price and its yield fell to 2.82%. Lower inflation and soggy retail sales are a strong signal to the Federal Reserve (whose Federal Open Market Committee is meeting today and will give a press conference this afternoon) to proceed with caution in raising interest rates.