The Labor Department reported that the May CPI did not show an increase. This shows that the stronghold of inflation in the US economy is waning.
May CPI report
The May CPI report, which measures inflation through the cost of a basket of goods and services, stayed the same on a monthly basis. However, according to the Bureau of Labor Statistics, CPI for May 2024 rose 3.3% over the past year.
The economists surveyed by Dow Jones expected a monthly increase of 0.1% and an annual rate of 3.4%. Excluding volatile food and energy prices, core CPI data for May 2024 rose 0.2% in May and 3.4% over the year. This is slightly below the predicted 0.3% monthly and 3.5% annually.
After the report, stock market futures increased, and Treasury yields went down. While overall inflation numbers were down, shelter inflation increased by 0.4% for the month and 5.4% over the year. Housing costs, a significant part of the CPI data for May 2024, remain a challenge in the Federal Reserve’s fight against inflation.
Price increases were moderated by a 2% drop in the energy index and a 0.1% rise in food prices. Gas prices decreased by 3.6%. Motor vehicle insurance, another inflation concern, decreased by 0.1% monthly but remained over 20% higher annually.
What Do the Economists Say?
Robert Fric, an economist at Navy Federal Credit Union, said that the CPI data for May 2024 was good in both the headline and core aspects. He added that gas prices went down, but unfortunately, housing costs continue to rise and drive inflation. He believes the economy might not see significant drops in CPI until the shelter costs decrease.
The May 2024 CPI data is crucial for the economy as the Federal Reserve considers its next monetary policy actions, which are heavily influenced by the inflation outlook.
The Federal Reserve expects to keep the benchmark rate at around 5.25%- 5.50%.
After the May CPI report release, futures traders increased the likelihood of the Fed cutting rates in September, the first reduction since the early days of the Covid pandemic.
According to the CME Group’s FedWatch, the market-implied probability of a September rate cut rose to 73%, up from 53% the previous day. The odds for a second cut in December increased to 72% from about 50-50.
However, the market outlook remains volatile based on the May CPI report. Moreover, the Fed officials stressed the need for more than a month or two of positive data before easing the policy.
Joseph LaVorgna, chief economist at SMBC Nikko Securities, said that at least three months of very favorable inflation data would cut rates in September. Easing or even discussing easing sooner could complicate the Fed’s goal of bringing inflation back to 2%.
Persistent inflation has kept the Fed from changing rates since July 2023. In March, FOMC members suggested they might cut rates three times this year by a total of 0.75 percentage points, but they are now expected to reduce that to two or even just one cut.
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