On Wednesday, investors will digest one of the most important data points that will determine the Federal Reserve’s future interest rate policy: the May consumer price index (CPI).
The inflation report, released at 8:30 AM ET, comes just ahead of the central bank’s policy decision at 2:00 PM ET. Headline inflation is expected to reach 3.4%, matching the annual price increase in April, according to Bloomberg estimates.
Last month, consumer prices are expected to rise 0.1%, a slowdown from the 0.3% month-on-month increase in April. That would also be the smallest monthly increase since October 2023.
According to Bank of America, a decline in energy prices is likely to contribute to further downward pressure on the headline CPI.
“Energy prices are likely to have fallen in May on a seasonally adjusted basis due to a decline in petrol prices. This was likely a relief for 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 crude oil prices falling, gas prices are likely to continue falling in the near term.”
On a core basis, which excludes the more volatile costs of food and gas, prices in May are expected to have risen 3.5% year-on-year – a slight slowdown from annual up 3.6% in April, according to Bloomberg data. .
Core prices are expected to rise 0.3% month-on-month in May, similar to April.
Core inflation has remained stubbornly high due to higher costs for shelter and core services such as insurance and medical care. But BofA expects these categories to “take a very small step in the right direction.”
“Shelter inflation was likely slightly firmer this month due to an increase in non-housing housing prices,” Juneau and Gapen said. “However, core ex-shelter services should show some moderation as we look for softer increases across several service categories.”
Over time, economists said they expect “more notable progress on services inflation,” thanks to moderations in auto insurance, rents and owners’ equivalent rents. Owner’s equivalent rent is the hypothetical rent a homeowner would pay for the same property.
The Goldman Sachs team, led by Jan Hatzius, agreed that “further disinflation” is in the pipeline this year, citing “the restoration of balance in the auto, home rental and labor markets.”
Still, “we expect offsets from catch-up inflation in health care and auto insurance and from single-family rental growth continuing to outpace multifamily rental growth.”
Goldman expects core annualized CPI inflation of 3.5% and core PCE inflation of 2.8% in December 2024.
To cut or not to cut?
Inflation remains stubbornly above the Federal Reserve’s 2% annualized target. And while this CPI report won’t have an outsized effect on the Fed’s impending decision, the timing may have created even more spectacle surrounding its release.
Fed officials have categorized the path to 2% as “bumpy,” while other recent economic data has fueled the Fed’s “longer the longer” narrative about the rate path.
On Friday, the Bureau of Labor Statistics showed that the labor market added 272,000 nonfarm jobs last month, significantly more than the 180,000 economists expect. Wages also exceeded expectations at 4.1%, although the unemployment rate rose slightly from 3.9% to 4%.
In particular, the Fed’s preferred inflation gauge, the so-called core PCE price index, has remained particularly persistent. The year-over-year change in core PCE, closely watched by the Fed, remained stable at 2.8% in April, similar to March.
“If the report is in line with our expectations, we remain committed to our expectation that the Fed will make one cut this year in December,” BofA said. “We believe it is unlikely that inflation rates will soften sufficiently in coming months to allow the Fed to make cuts before December. The biggest risk to earlier cuts is a faster slowdown in employment growth than we expect, or a sharper slowdown in inflation.”
Investors now expect a series of one to two cuts of 25 basis points in 2024, down from the six cuts expected at the start of the year, according to Bloomberg data.
As of Tuesday, markets had priced in a roughly 48% chance that the Federal Reserve would cut rates at its September meeting, data from CME Group showed.
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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