Finally, some good news! Inflation in the United States has remained steady, but in May it offered a bit of relief by dropping to 3.3%, according to data from the Bureau of Labor Statistics. This figure is one-tenth less than in April, surpassing economists’ expectations of a 0.1% monthly increase and an annual rate of 3.4%. Core inflation also fell by two-tenths, standing at 3.4%. This news comes at a perfect time for the Federal Reserve, which is currently in a monetary policy meeting.
Gasoline prices dropped by 3.6% in May, leaving their annual increase at just 2.2%. Food prices rose by 0.1% for the month and 2.1% over the year. However, the costs of housing, transportation, and electricity continue to keep inflation far from the 2% target.
This drop has implications on two fronts. Politically, inflation has affected President Joe Biden’s popularity, as he has faced criticism for rising prices during his term, though May’s relief could offer some respite. On the monetary policy front, the Federal Reserve has implemented the most aggressive interest rate hikes since the 1980s, aiming to approach the 2% target.
Although the inflation rate preferred by Federal Reserve Chair Jerome Powell is slightly below 3%, interest rates are not expected to be lowered until more confidence in price stability is achieved. This data is published just as the second day of the Federal Open Market Committee (FOMC) meeting begins, which is likely to keep interest rates in the 5.25%-5.5% range, the highest in 23 years.
Poor inflation data from the first quarter and a strong labor market have led the Federal Reserve to move away from the possibility of cutting rates. This Wednesday, Federal Reserve members will update their economic projections, something they do at the last meeting of each quarter.
Fewer Rate Cuts
In March, forecasts pointed to a rate cut of 0.75 points by the end of the year, equivalent to three 0.25-point cuts. The 18 Federal Reserve members participating in the Summary of Economic Projections (SEP) offered forecasts on economic growth, inflation, unemployment rates, and interest rates.
In March, they expected interest rates to drop to 4.625% by the end of the year, and then to 3.875% in 2025, with a further reduction to 3.125% in 2026. This Wednesday, the central bank is expected to adjust this roadmap. Analysts are divided on whether the new forecasts will include one or two 0.25-point rate cuts by the end of the year, but the recent inflation data could tip the scales towards two cuts.
Beyond the forecasts, the market will also be attentive to the FOMC’s statement and Powell’s comments during the press conference. It is expected that the committee will maintain the need for greater confidence that inflation is moving sustainably towards 2% before making significant moves. Meanwhile, the central bank will continue to base its decisions on additional data as it becomes available. With this outlook, any move on interest rates seems unlikely until at least the September meeting.