Gas prices displayed on a sign at a Shell gas station in San Francisco, California, USA, on Tuesday, May 23, 2023. Bloomberg | Bloomberg | Getty Images
Inflation data from May is anticipated to reveal a slowdown in the price increases that have been plaguing consumers for the past two years. However, the real question is whether this deceleration will be sufficient to convince Federal Reserve officials to halt interest rate hikes and allow the US economy to breathe on its own.
The consumer price index (CPI) is set to be released on Tuesday at 8:30 a.m ET. According to the Dow Jones consensus estimate, it is expected to indicate a mere 0.1% increase in all-items inflation last month, equivalent to a 4% annual rate. When excluding the volatile food and energy components, CPI is forecasted to rise by 0.4% and 5.3% respectively.
These figures could potentially encourage policymakers that inflation is heading in the right direction, particularly after reaching a peak above 9% in June 2022. Mark Zandi, the chief economist at Moody’s Analytics, states that “the most encouraging thing is the year-over-year growth rates are going to come down pretty sharply.” This positive trend in inflation is a strong indication that it is moving in the right direction.
Undoubtedly, inflation has come a long way since its surge in the spring of 2021. Factors such as disrupted supply chains, increased demand for goods over services due to the pandemic, and significant monetary and fiscal stimulus led to inflation reaching its highest level since the early 1980s.
After initially dismissing the idea that inflation would last, the Fed initiated a series of 10 interest rate hikes in March 2022. As a result, inflation has been gradually declining but still remains far from the central bank’s 2% target.
Based on the expected May CPI report, it is anticipated that policymakers on the Federal Open Market Committee will refrain from raising interest rates during their meeting this week. They will likely wait for more data and carefully consider the longer-term policy trajectory.
Dean Baker, the co-founder of the Center for Economic and Policy Research, notes that “inflation has been trending downward for the last year.” However, it remains a question of whether this downward trajectory is continuing or if a plateau has been reached, as inflation is still well above the Fed’s 2% target.
While market expectations suggest that the Fed will skip a rate hike at its upcoming meeting, a final increase in July is more likely before an extended pause that is projected to last until early 2024, according to CME Group’s gauge of trading in the fed funds futures market.
The CPI report, along with another month’s worth of data leading up to the Fed’s July meeting, will play a crucial role in determining whether the market’s predictions are correct or if further action is required.
Bill English, a former Fed official and current finance professor at the Yale School of Management, emphasizes that the path to a soft landing for the economy depends largely on how inflation unfolds. If inflation remains high, the Fed will need to continue raising rates. Achieving the goal of decreasing inflation to 2% within a couple of years may require a path for employment and output that is less favorable.
In summary, the upcoming May CPI report will provide valuable insights into the state of inflation. Its findings will influence the Federal Reserve’s decision-making and have significant implications for the US economy’s future path.
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