Consumer prices in May rose at the slowest pace since April 2021, according to the latest data from the Bureau of Labor Statistics released Tuesday morning. That’s leading Wall Street economists to generally agree the outcome of the Fed’s meeting this week will be a pause in interest rate hikes. The question is what the central bank will do in July.
Data from the Consumer Price Index (CPI) report for May showed that headline CPI increased 4% over last year – a smaller rise than the expected 4.1%. While the increase is down from a peak of 8.9%, it’s still hanging well above the Fed’s target of 2%.
Stocks rose as investors upped their bets that the Fed will halt its interest rate hiking campaign after 10 consecutive increases. Markets are currently pricing in a 95% chance the Federal Reserve doesn’t hike rates with its 2 p.m. statement release on Wednesday.
After the CPI report was released Tuesday morning, Wall Street economists pointed out that the decline in energy prices (down 11.7% year-over-year) and improvement in food costs ( up 0.2% over April) were key drivers in cooling down headline inflation. But “core” inflation, which excludes energy and food, slowed slightly less than expected. That metric rose 5.3%, compared to the consensus of 5.2%.
The mixed picture all but guarantees a Fed pause in June, per economists, but beyond that, the picture becomes murkier. As EY’s Chief Economist Gregory Daco put it: Inflation is sticky, and the Fed faces a “should I stay, or should I go” dilemma.
Gregory Daco, chief economist, EY:
“The latest consumer price inflation data doesn’t change the Fed outlook for a June rate hike skip, but it illustrates the ‘should I stay, or should I go’ dilemma that the Fed faces when considering further rate increases.”
“Some Fed policymakers will interpret the persistent (and backward-looking) core inflationary pressure and an indication to ‘go’ on tightening, while others with more of a forward-looking policy framework will see justification to ‘stay.'”
Chris Zaccarelli, chief investment officer, Independent Advisor Alliance:
“Today’s report is a non-event, which is extremely important as the Fed’s bias is clearly to pause tomorrow and leave interest rates unchanged, which is something that would have been difficult had this been an upside surprise to the inflation numbers.”
Stephen Juneau and Michael Gapen, US economists, Bank of America:
“The May CPI report, like April, suggests core inflation is being narrowly driven by used cars and shelter. Outside of those two components, the trend has become very encouraging. Moreover, we see reasons to expect that the current two tailwinds of core CPI will ease over the course of the year and into next. Therefore, we should continue to see improvement in core CPI, though it’s likely to be more gradual than the disinflation of headline CPI.”
Veronica Clark, economist, Citi
“While details can vary month-to-month, core inflation by a number of measures has been at or above 5% for two years. Despite markets pricing very little chance of a rate hike by the Fed tomorrow, we maintain our base case for a 25bp hike. If the Fed does ‘skip’ a hike in June (a difficult decision to communicate as growth, inflation, and policy rate forecasts are very likely to be revised higher), we would expect some hawkish surprise at some point as underlying inflation remains stably too strong.”
Ryan Sweet, chief US economist, Oxford Economics:
“The May consumer price index doesn’t alter the Fed’s plan to pause this week, and the recent drop in oil prices support our forecast for the central bank to remain on hold through the remainder of this year before starting to cut interest rates in early 2024.”
“Core services inflation excluding housing, which the Fed is laser focused on because of its stickiness, rose 0.2% m/m. This is a slight acceleration from that in April and will keep the Fed’s rhetoric as hawkish but doesn’t mean that another rate hike is imminent.”
Thomas Simons, US economist, Jefferies:
“The CPI data this month is mixed on the whole, and likely to help confirm pre-release biases in the outlook among investors. The soft landing/’immaculate disinflation’ camp can point to the deceleration in the headline, deceleration in core services, and the fact that headline would have been flat if it weren’t for used cars as signs that the Fed is getting what it wants without having to engineer a big slowdown in growth. However, the hard landing camp can point to the decline in energy prices that won’t be repeated, and the continued pressure in both shelter and core service prices as reasons to expect that consumers are going to pull back on discretionary spending as reasons to believe we are already headed for a recession.”
“With this data, the Fed can end the rate hike cycle, but there isn’t sufficient evidence to show that rate cuts are coming any time soon.”
Sarah House and Michael Pugliese, economists, Wells Fargo:
“The Fed’s inflation fight continues to move in the right direction, but overall progress remains frustratingly slow. Headline inflation has shown the most progress amid sharp declines in energy prices and much slower food inflation, but the headline CPI is still unacceptably high at 4.0% year-over-year. Even more troubling is the recalcitrance of core inflation. The core CPI is up 5.3% over the past 12 months and 5.0% over the past three months (annualized), a sign that core inflation has slowed, but only marginally.”
Rakeen Mabud, chief economist, Groundwork Collaborative:
“[W]hat sticks out in this report is that inflation is sticking around, and whatever the Fed is doing is not working. The reason it’s not working is because the tools the Fed has to address high prices don’t actually get at the core root causes of what’s causing this inflation: corporate profiteering, we have supply chain issues, geopolitical factors.”
“And some of these issues have started to moderate… but the fact of the matter is the Fed, through its ten consecutive interest rate hikes, has simply been hammering away at the labor market and really trying to weaken a labor market that has been remarkably strong coming out of the pandemic. I think we need to really take a different approach. The Fed should not only pause tomorrow but really pause going forward.”
Chris Harvey, head of equity strategy, Wells Fargo:
“You can’t say mission accomplished. The Fed still has to do more. We’re looking at a situation where we haven’t broken the economy, the job market is still incredibly strong, inflation is stubbornly sticky and they’re talking about a pause.”
Nigel Green, CEO and founder, deVere Group:
“It’s a feel-good headline figure that will cheer investors as it will add further pressure on the Fed to pause its interest rate hike agenda.”
“The likely market relief rally that is expected if the Fed pauses could provide important opportunities for investors, but they shouldn’t get overconfident that this is the end of the most aggressive monetary policy since the 1980s.”
“The Fed isn’t done yet.”
Bill Adams, chief economist, Comerica Bank:
“A rate hike is still possible in July or the following decision in September, but the Fed looks slightly more likely to hold rates steady in its next few decisions; it is a close call.”
“The outlook for inflation largely depends on how resilient the economy proves in the second half of the year. The most likely path for the economy is a modest contraction in aggregate activity, largely due to businesses running down inventories and to less activity in capital-intensive activities like business capital spending and manufacturing; those areas of the economy are most sensitive to the long and variable lags of the Fed’s rate hikes.”
Eugenio Aleman, chief economist, Raymond James:
“Although the headline Consumer Price Index (CPI) increased by a less than expected 0.1% on a month-over-month basis and by ‘only’ 4.0% on a year ago basis, core consumer prices increased 0.4%, which was in line with expectations but still too strong for policymakers. We are still waiting for the slowdown in shelter costs to start to make its way into the calculation of inflation, but so far, it has remained highly elusive. For now, all the progress in bringing down inflation has been made by the energy component of the Index, which means that the disinflation process remains dependent on continued weakness in energy prices. Betting on continued weakness in such a volatile component of inflation is not a good strategy for policymakers.”
“The May report includes good news for both bulls and bears, with headline inflation slowing down to 4.0% on a year earlier basis in May while core prices remained strong, at 5.3% during the same period.”
Preston Caldwell, chief US economist, Morningstar:
“Without CPI accelerating, I think the Fed will refrain from hiking in June, and for good reason. There’s still much deflationary momentum in the pipeline, as the effects from Fed rate hikes weighing down the real economy are far from fully playing out.”
“If used car prices had been flat in May rather than the surprise 4.4% increase, core inflation would’ve hit a 6-month low. Wholesale prices (the Manheim index) [were]falling for two consecutive months, so the used car price rebound is likely to reverse in coming months.”
Ian Shepherdson, chief economist, Pantheon Macroeconomics:
“Overall, year-over-year headline inflation fell to 4.0% from 4.9%, thanks to the anniversary of a big m/m increase in May last year, and a similar story in June means the y/y rate should drop to just 3.1%. Such rapid headline disinflation will make it harder for the Fed to justify raising rates again, but we can’t rule out a July hike yet.”
Claudia Sahm, founder, Sahm Consulting:
“These numbers came in largely as expected. It shouldn’t change the path. And again, they have been very clear they see inflation as too high. I do think we’re getting to a point where the Fed risks doing too much.”
“Regardless of how these numbers came out today… we will all admit inflation is too high. The policymakers that have [chosen] to bring inflation down needed to keep going.”