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Consumer prices are expected to remain stable as the Fed weighs the “bumpy” impact of inflation on the path of rates
On Wednesday, investors will digest one of the most important data points that will shape the Federal Reserve’s future interest rate policy: the May Consumer Price Index (CPI).
The inflation report, scheduled for release at 8:30 am ET, will be released shortly before the central bank’s policy decision at 2 pm ET. It is expected to show global inflation of 3.4%, equaling April’s annual price gainaccording to Bloomberg estimates.
In the previous month, consumer prices are expected to have risen 0.1%, a slowdown from April’s 0.3% monthly increase. This would also be the smallest month-over-month increase since October 2023.
A decline in energy prices will likely contribute to further downward pressure on the global CPI, according to Bank of America.
“Energy prices likely fell in May on a seasonally adjusted basis due to a drop in gasoline prices. This likely came as a relief to consumers after gas prices rose in April and March,” BofA economists Stephen Juneau and Michael Gapen wrote in a note to clients last week. “With oil prices falling, gas prices will likely continue to fall in the near term.”
On a “baseline” basis, which excludes the more volatile costs of food and gas, prices in May are expected to have risen 3.5% compared to last year – a slight slowdown from the 3.6% annual increase seen in April, according to data from Bloomberg. .
Core prices are expected to have risen 0.3% month over month in May, matching April.
Underlying inflation has remained stubbornly high due to higher costs for shelter and essential services such as insurance and medical care. But BofA hopes these categories “take a very small step in the right direction.”
“Shelter inflation was likely a bit firmer this month due to an increase in away-from-home lodging prices,” Juneau and Gapen said. “However, basic ex shelter services should show some moderation as we look for smoother increases across several service categories.”
Over time, the economists said they “expect to see more notable progress in services inflation” thanks to moderations in auto insurance, rents and homeowners’ income equivalency. Owner’s equivalent rent is the hypothetical rent a landlord would pay for the same property.
The Goldman Sachs team, led by Jan Hatzius, agreed that “more disinflation” remains in the works this year, citing “the rebalancing in the automobile, housing rental and labor markets”.
Still, “we expect the offsets from rebounding inflation in health and auto insurance and growth in single-family rents to continue to outpace growth in multifamily rents.”
The story continues
Goldman forecasts annual core CPI inflation of 3.5% and core PCE inflation of 2.8% in December 2024.
To cut or not to cut?
Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, May 1, 2024. (AP Photo/Susan Walsh, File) (ASSOCIATED PRESS)
Inflation has remained stubbornly above the Federal Reserve’s 2% annual target. And while this CPI report did not have a disproportionate effect on the Fed’s imminent decision, the timing perhaps added even more spectacle to its release.
Fed officials classified the downward trajectory to 2% as “protuberance,” while other recent economic data has fueled the louder narrative for longer on the path of interest rates.
On Friday, the Bureau of Labor Statistics showed the job market added 272,000 non-farm jobs last month, increases significantly greater than the 180,000 expected by economists. Wages were also above estimates of 4.1%, although the unemployment rate rose slightly from 3.9% to 4%.
Notably, the Fed’s preferred inflation gauge, the so-called core PCE price index, has remained particularly tight. The year-over-year change in core PCE, closely watched by the Fed, remained stable at 2.8% in Aprilcorresponding to March.
“If the report is in line with our expectations, we will maintain our expectation that the Fed will cut once this year, in December,” BofA said. “We believe inflation data is unlikely to decline enough in the coming months to allow the Fed to make cuts before December. The main risk to earlier cuts is a faster slowdown in job growth than we project or a sharper slowdown in hedged inflation.”
Investors now anticipate a range of one to two 25 basis point cuts in 2024, down from the six cuts expected at the start of the year, according to Bloomberg data.
On Tuesday, markets were forecasting a roughly 48% probability that the Federal Reserve would begin cutting rates at its September meeting, according to data from CME Group.
Alexandra Canal is a senior reporter at Yahoo Finance. Follow her on X @allie_canal, linkedin, and email her at alexandra.canal@yahoofinance.com.
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