The U.S. Department of Labor released a report on Wednesday, June 12th, indicating that the Consumer Price Index (CPI) for May showed no change compared to the previous month, with a year-on-year increase of 3.3%. These figures are lower than the expectations set by economists surveyed by Dow Jones, who had predicted a 0.1% month-on-month increase and a 3.4% year-on-year increase in the CPI for May.
Excluding the more volatile food and energy sectors, the core CPI for May rose by 0.2% month-on-month and 3.4% year-on-year, both below the expected 0.3% and 3.5% increases, respectively.
Despite both the May CPI and core CPI coming in lower than expected, the rising cost of housing cannot be ignored, with an increase of 0.4% month-on-month and 5.4% year-on-year. Housing-related data has been a crucial factor in the Federal Reserve’s battle against inflation, given its significant weight in the CPI.
In May, the energy index fell by 2% month-on-month but rose by 3.7% year-on-year; the food index increased by 0.1% month-on-month and 2.1% year-on-year; new car prices decreased by 0.5% month-on-month and 0.8% year-on-year; while used car prices increased by 0.6% month-on-month but decreased by 9.3% year-on-year.
Following the release of the report, stock market futures rallied, while bond yields decreased.
According to CNBC, Robert Frick, Corporate Economist at Navy Federal Credit Union, mentioned, “There are finally some positive surprises because both overall inflation and core inflation are lower than expected.” He further noted, “The situation with gas prices has eased somewhat, but unfortunately, housing and apartment costs continue to rise, remaining a key driver of inflation. We won’t see a significant drop in CPI until we start to see the long-awaited decrease in housing costs.”
The release of this report comes at a critical time as the Federal Reserve weighs their next monetary policy steps. Monetary policy decisions will largely depend on the direction of inflation. The Federal Open Market Committee is expected to maintain the benchmark interest rate at this two-day policy meeting on Wednesday, awaiting further evidence that inflation rates are moving towards the 2% target.
While it is unlikely that the Federal Reserve will announce a rate cut at the conclusion of the meeting on Wednesday, a strong inflation report for May could be a prerequisite for future rate cuts.
Economists and investors eagerly await this report to gain insights into when the Federal Reserve may cut rates. Following the CPI report, futures traders have raised the possibility of a rate cut in September by the Federal Reserve. However, market outlook remains uncertain, with Fed officials emphasizing the need for a few more months of positive data before policy adjustments can be considered.
Joseph LaVorgna, Chief Economist at SMBC Nikko Securities, mentioned, “You would need another three months of very friendly inflation data to cut rates in September.” He added, “If they start to ease or talk more about easing policies, I think they will make it more difficult to return inflation to the 2% target.”
Overall, these discussions reflect the complex balancing act faced by the Federal Reserve as they navigate through economic indicators and market uncertainties in their decision-making process.