Consumer prices in May rose at the slowest annual pace since March 2021, according to fresh data released Tuesday by the Bureau of Labor Statistics.

The Consumer Price Index, a key inflation gauge that measures price changes for a basket of goods and services, increased 4% for the year ending in May.

That represents a sharp pullback from April's 4.9% and is slightly below economists' expectations for a 4.1% gain, according to Refinitiv. On a monthly basis, prices ticked up 0.1%. Economists were expecting prices to increase by 0.2% from April to May.

It's the 11th consecutive month that inflation has slowed, and it's a welcome reprieve from the painful shock of persistently high inflation endured during the past two years. This time last year, that CPI print was more than double at 8.6%.

"It's another step in the right direction," Nancy Vanden Houten, lead US economist at Oxford Economics, said in an interview with CNN.

A drop in energy prices and a slowdown in food price hikes helped bring down the headline number, as did the influence of what is known as base effects: A year ago, inflation was marching upward and setting fresh 41-year highs before topping out at 9.1% in June.

While 4% is a far cry from 9.1%, it's also still well above the desired inflation target for the Federal Reserve, which has been in the throes of a historic monetary tightening campaign since March 2022. The Fed would like to see inflation (as measured by the core Personal Consumption Expenditures index) settle in at 2%.

"Inflation is still much too high, but the trend is in the right direction, and the Fed is ready to take a break from raising interest rates," Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said in a statement. "They've raised rates for 10 consecutive meetings in a row and the [5 point] increase is the most and fastest pace in decades, so they want to wait and see if their actions are sufficient to keep inflation moving in the right direction."

Tuesday's CPI report comes as Fed officials sit down for the first day of their monetary policymaking meeting and is one of the last major pieces of economic data to digest before they announce their rate decision on Wednesday.

Since March 2022, the Fed has increased its benchmark interest rate 10 consecutive times in an attempt to bring down historically high levels of inflation, but is widely expected to pause that hiking campaign this time to digest the cumulative — and lagging — effects of monetary tightening as well as the impacts from stricter lending standards within the banking industry.

Markets are currently pricing in a 95.3% probability that the Fed pauses on Wednesday, according to CME FedWatch.

Cars and rent are big drivers of inflation ... for now

Food inflation continued to decline on an annual basis; however, price increases did pick up slightly in May for groceries as well as food away from home, by 0.1% and 0.5%, respectively.

Within food, there were some bright spots — particularly bright yellow yolky ones.

Egg prices, which skyrocketed last year as a deadly avian flu hit US flocks, sank 13.8% from April, marking the largest monthly drop for that category since 1951. That latest downswing means that egg prices are actually now down from last year.

Prices for groceries and food away from home increased on a monthly basis When stripping out the more volatile components of food and energy, core CPI measured 5.3% for the year, slightly down from April's annual reading. On monthly basis, the core index ticked up 0.4%.

The core readings are right in line with economists' predictions, according to consensus estimates on Refinitiv.

Underlying inflation (as well as the overall reading) has been propped up by price gains in categories such as shelter and used cars, as well as services excluding rent, according to BLS data. The first two, however, are expected show some considerable easing sooner than later, Vanden Houten said.

Shelter, which is largely a measurement of rental leases as the implicit rental value of owner-occupied properties, carries a lot of weight in the CPI calculations; however, it comes at a significant lag because of how infrequently the data is collected (and how infrequently rents change in leases).

There's been a slowdown recently in the cost of rents and new leases, which could manifest as a slowing in annual shelter inflation during the course of the coming year, researchers for the Federal Reserve Bank of Richmond noted earlier this year.

Additionally, wholesale used car prices have shown a cooldown in recent months and that could be a guide for what consumers end up seeing at the dealerships in the coming months, Vanden Houten said.

"It looks like this increase in US car prices in the past two months should fade away, maybe in June or perhaps July," she said. "And we can feel fairly confident that given what's going on with rents over the last year, this will start to trend lower. And once the turn happens, I think that those housing costs will move lower pretty quickly and that should help bring down core CPI."

More work — and more risks — ahead

Tuesday's CPI report did provide a hint of progress on an index that has held particular interest for the Fed: The services excluding housing category declined by 0.2% on a monthly basis and fell to 4.2% on an annual level.

Inflation within that category has been an ongoing source of concern, because it has greater potential to be "sticky." Because labor costs are more heavily weighted in services businesses than goods, the tight labor market and wage increases have a greater potential in keeping inflation elevated.

Numerous studies have shown there's no evidence of wage growth driving inflation; however, some economists have expressed concern about how a strong labor market and resilient consumer spending could result in demand-side pressure on inflation.

"Food Away from Home price inflation posted a 5.8% annualized growth pace for the month; Leisure & Hospitality employment gains have slowed this year and overall employment in this collection of industries remains well below pre-pandemic levels," Kurt Rankin, senior economist for PNC Financial Services, wrote in a note. "So, wage growth pressures remain due to lack of labor supply and Food Away from Home price gains will likely be unrelenting as summer spending kicks consumer spending on recreational activities into overdrive."

PNC economists, as well as others, continue to predict that a mild recession is in store for the United States later this year.

"Inflation's inability to reach the Fed's average 2% year-over-year target as a result of persistent consumer demand will provide cover for keeping interest rates high, which in turn will eat away at business activity and increase costs on households as they accumulate more high-interest debt in support of their spending habits," Rankin wrote. "These forces will ultimately combine to force a slowdown in consumption, which is the prerequisite for any US recession."