The US May inflation reading and the Fed’s new interest rate decision were released on Wednesday. Here’s what happened.
The US Consumer Price Index (CPI) remained stable in May at 3.3% growth year-on-year, unchanged from the previous reading in April. Economists had predicted a 0.1% monthly rise, or 3.4% annually, making this the first better-than-expected inflation reading in the US in a long time.
The Consumer Price Index is a widely used indicator for broad inflation, often conjugated with its core measure, which excludes volatile goods like food and energy. Core CPI declined in May to 3.4% annually from 3.6% in April and better than the 3.5% expected by market analysts.
Housing remained the stickier item in the inflationary basket, with prices climbing 5.4% year-on-year, or 0.4% for the month. This measure was, however, counterbalanced by a 2% drop in energy prices and a 3.6% drop in gasoline prices.
Economists were worried that increased tensions in the Middle East and OPEC’s extension of its voluntary production cut would worsen domestic gasoline prices. But with global demand shifting downward and the US remaining the world’s largest crude producer, these fears have not materialized.
“Finally, some positive surprises as both headline and core inflation beat forecasts,” said a corporate economist at Navy Federal Credit Union. “There was relief at the pump, but unfortunately home and apartment costs continue to rise and remain the main cause of inflation. Until those shelter costs begin their long-awaited fall, we won’t see major drops in CPI.”
The Fed’s meeting
Hours after the CPI reading was released, the Federal Reserve ended its June meeting. The Federal Open Market Committee (FOMC) led by Chairman Jerome Powell decided to leave interest rates unchanged.
The Federal Reserve brought interest rates to a 23-year high in June 2023 and has since kept them unchanged. The Committee’s strategy is to wait and see inflation on a stable path towards the 2% target.
Despite the positive CPI report, the Fed’s preferred index to monitor inflation is the Personal Consumption Expenditure (PCE), which gives a broader view of consumers’ attitudes. “We welcome today’s reading and hope for more like that,” Powell nevertheless said in his post-meeting speech.
Powell said he envisions at least one rate cut this year, most likely in November. However, “September is not off the table,” he said.
A pivot in September would give leeway to President Joe Biden’s reelection campaign, cementing a victory against inflation and leading to lower interest rates in the future. However, the US economy may still not go the way Biden and the Fed intended. There is simply not enough data to know for certain yet.
