US inflation holds flat in May, but prices up 3.3% from a year ago

The US consumer price index (CPI) showed no increase in May, indicating a slight easing of inflation's persistent hold on the American economy, the Labor Department reported Wednesday.

The CPI, a comprehensive inflation gauge that measures the cost of a basket of goods and services across the U.S. economy, remained flat for the month but increased by 3.3% from a year ago, according to the Bureau of Labor Statistics.

Economists surveyed by Dow Jones had expected a 0.1% monthly gain and a 3.4% annual rate. In April, the monthly US inflation rate rose by 0.3%, while the annual rate was 3.3%.

Excluding volatile food and energy prices, the core CPI increased by 0.2% for the month and 3.4% from a year ago, compared with respective estimates of 0.3% and 3.5%.

Softer US inflation reading welcome news for the Fed

May's softer US inflation data is welcome news for Federal Reserve officials aiming to bring consumer prices back to their 2% target.

However, as the Federal Open Market Committee (FOMC) concludes its June meeting this afternoon, the Fed is not expected to overreact to the positive inflation data — as per a comment from Markets.com Chief Market Analyst Neil Wilson earlier today, the Fed is likely to “push back” on interest rate cuts in its announcement.  

It is widely anticipated that the Fed will maintain the current interest rate range of 5.25% to 5.50% on Wednesday.

Despite Wednesday’s US inflation data, many economists and analysts believe that the Fed will keep interest rates on hold not only this month — but also at the July meeting, given the strong May jobs report. U.S. employers added 272,000 jobs last month, significantly exceeding the consensus estimate of 180,000.

Barron’s cited Lindsay Rosner, head of multi-sector investing within Goldman Sachs Asset Management, as saying:

“It would take an extremely soft CPI print to change the course of the Fed in July after a strong payroll report last week. We squarely believe today is a no-go meeting and the CPI number was not weak enough to change our view on July’s meeting.”

Better-than-expected US inflation report keeps September rate cut in play

Nevertheless, Wednesday’s better-than-expected US inflation report keeps the possibility of a September interest-rate cut in play. Fed officials may revise their projections to include only one or two rate cuts this year in the updated economic summary expected Wednesday afternoon. Following the inflation report, the odds of a September rate cut increased to 63% from about 50%, according to the CME FedWatch Tool.

The May CPI data also suggest that the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) index, will likely show favorable results when released on June 28.

Capital Economics: US inflation fundamentals “encouraging”

Economists at Citi, Morgan Stanley, and Capital Economics all project that core PCE inflation will decrease to a 0.1% monthly rate in May, down from 0.3% in April.  

If accurate, this would equate to a 1.6% annualized PCE inflation rate, according to Paul Ashworth, chief North America economist at Capital Economics. In a report on Wednesday, Barron’s cited Ashworth as saying:

“That’s the sort of below-target A+ data Fed officials like Christopher Waller have been waiting for. We still need several more months of this, but the fundamentals are encouraging.”

Fitch: US inflation report “delightful appetizer” ahead of Fed policy announcement

Wednesday’s US inflation report is “a delightful appetizer” ahead of the Federal Reserve’s interest rate policy decision coming up later today, according to Olu Sonola, head of US economic research at Fitch Ratings, who shared his reaction with MarketWatch in emailed comments. He wrote:

“The core services print of 0.2% was the lowest since September 2021 and that will definitely boost confidence if that trend continues over the next couple of months. While the door to an interest rate cut in July is effectively shut, the window still looks open for later on this year."

According to the CME FedWatch Tool, federal-funds futures indicate an 85.5% probability that the Federal Reserve will maintain its benchmark rate at the current target range of 5.25% to 5.5% in July. As of Wednesday morning, traders largely anticipated that the Fed's first interest rate cut could occur as early as September.

The Federal Reserve will release its policy statement at 2 p.m. Eastern time on Wednesday, followed by a press conference hosted by Fed Chair Jerome Powell at 2:30 p.m.