Good signs for the Federal Reserve, which meets for two days starting today to review its monetary policy. The Consumer Price Index (CPI) increased by 0.1% in May in the US, month-on-month, and 4% in the last 12 months, that is, year-on-year, and nine tenths less than in April ( the second steepest decline since the indicator began to moderate in July of last year). The core index, ie excluding food and energy, rose 0.4% in May and 5.3% over the past year, in line with forecasts. Investors had expected the headline CPI to rise 4.1% year-on-year from May 2022, a notable drop from the 4.9% recorded in April. In month-on-month terms, they expected an increase of 0.4%. The April data was the slowest year-on-year inflation reading in two years, making the 4% rise in headline CPI last month the most moderate since April 2021. House prices, along with cars and used trucks, was the one that contributed the most to the monthly increase of all articles, while that of food (restoration) increased by 0.2% in May after remaining unchanged the two previous months. Energy fell by 3.6% in May. The food at home index rose 0.1%,
The slight increase in the core CPI was taken for granted in all forecasts, slightly above the 5.2% expected by economists and investors, but a sustained slowdown compared to the 5.5% registered in April. The gradual moderation of inflation is still a long way from the Fed’s 2% target, but it is still further from the peak registered last summer, 9%, and from the maximum recorded in the mid-1970s (above 12%) and in 1980, when it exceeded 14%, according to the US Bureau of Labor Statistics.
The inflation data for May and the latest monetary policy decision by the Federal Reserve (Fed), after ten consecutive increases in the price of money, will mark a week in which investors celebrate the dawn of a new bull market. The S&P 500 Index officially entered bullish territory last Thursday, following the longest losing streak since 1948.
The May inflation reading will determine the Fed’s announcement on Wednesday after a two-day meeting. Investors expect the Federal Open Market Committee (FOMC), the Fed’s body in charge of monetary policy, to hit the pause button on the rate hike cycle, after ten consecutive hikes, one for each of their previous meetings. The strength of the labor market, which last month added 339,000 jobs with the highest entry since January, however makes it difficult for the Fed to slow down.
In addition to the recent rebound in employment, the latest readings on the manufacturing and services sectors showed a more resilient economy than many experts had expected, which seems to allay fears of a recession due to a hard landing for the economy caused by higher prices. money. At this week’s meeting, the central bank’s reference rate, the federal funds rate, is between 5% and 5.25%, the highest since September 2007.
Market participants are betting that today’s inflation report will be relatively subdued, which would give the Federal Reserve a hedge to keep interest rates unchanged at its meeting tomorrow. The so-called “Fed Pause” has helped boost some interest rate-sensitive sectors – technology stocks in particular – in recent weeks, pushing the Nasdaq and S&P 500 to 14-month highs yesterday.
“Ultimately, whether or not the Fed raises in June and beyond will depend on core CPI inflation,” Citi economists wrote in a note to clients last Friday. Like other observers who were expecting a slight pick-up in core inflation, Citi sees a chance that the May data will show higher-than-expected price gains as used car prices remain stubbornly high. Unlike last year’s data, caused by higher food and energy prices, this year inflation has settled in the service sector, with skyrocketing prices for plane tickets and used cars, among other sectors.
But the May jobs report also revealed a slowdown in wage growth and a slight rise in unemployment, leading some economists to think that the Federal Reserve’s tight fiscal policy is already paying off.
“There is not much data to suggest that the Federal Reserve will not follow through on its clear guidance to pause at next week’s Federal Open Market Committee meeting,” Michael Pearce, chief US economist at Oxford Economics, wrote in a note to customers on Friday. “Even if the core inflation number turns out to be positive, Fed officials will pay more attention to the trend, which is likely to be down in the second half, as base effects play in their favor,” Pearce added.
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