The US received good inflation news on Wednesday, which could pave the way for interest rate cuts this year.
According to the Labor Department, the consumer price index rose 3.3% year-on-year in May, down from 3.4% in April. report.
The “core” index, which strips out volatile food and energy prices and gives a clearer picture of underlying trends, rose 3.4% last month, down from 3.6% the previous month. That was the lowest annual increase in core prices since April 2021.
Compared to the previous month, the overall consumer price index was unchanged, while core prices rose 0.2%.
Economists had expected the broad index to show prices had risen 3.4% over the past year, up 0.1% from the previous month, while the core index was expected to rise 3.5% from a year earlier, up 0.3% from the previous month.
Inflation edged down slightly in April after three straight months of sharp price increases that spooked investors and alarmed Federal Reserve policymakers. The decline eased concerns about a sustained acceleration in inflation. The second monthly decline is seen as bolstering hopes that inflation is back on track to fall to the Fed’s 2% target, potentially laying the groundwork for interest rate cuts later this year.
After a decade of minimal price pressures, inflation spiked shortly after President Biden took office and enacted a massive deficit bill known as the American Rescue Plan. Expansionary fiscal policy was combined with easy monetary policy with interest rates near zero and supply chain disruptions caused by the effects of the pandemic and geopolitical conflict. This combination increased demand faster than the economy could respond.
The inflationary impact of Biden’s policies, dubbed “Bidenflation,” has led to deep public dissatisfaction with his economic leadership and historically low approval ratings. Despite low unemployment, sustained economic growth and a buoyant stock market, most indicators of consumer and small business sentiment remain weak.
The Federal Reserve concludes its two-day meeting late Wednesday and is widely expected to keep its policy rate unchanged in a range of 5.25% to 5.50%. Before inflation spiked earlier this year, the Fed was expected to cut interest rates several times, with three cuts anticipated, in 2024. The Fed is now expected to cut rates only one or two times this year.
In post-meeting minutes, prices in the federal funds rate futures market indicated investors were all but certain the Fed’s benchmark interest rate would be cut after the November meeting, with about a 70% chance of a rate cut at the September meeting.
Food prices rose 0.1% in May. Energy prices fell 2%.
Prices for major commodities were stable on the month, ending two months of declines. Prices for services rose 0.2%, boosted by a 0.4% increase in home prices and a 0.3% increase in health care costs.
