May Inflation Expected to Be Tame as Fed Focuses on Core CPI Trends

James Hyerczyk
Updated: Jun 12, 2024, 10:39 GMT+00:00

Key Points:

  • May's CPI expected to show a 0.1% rise, the smallest since October, signaling minimal inflation growth.
  • Falling gas prices, down 18 cents per gallon, contribute significantly to easing inflationary pressures in May.
  • If the trend of subdued inflation continues, the Federal Reserve might consider cutting interest rates later this year.
CPI 2024

Inflation Report Anticipation

Forecasters expect Wednesday’s inflation report to reveal a subdued increase in consumer prices for May, thanks primarily to declining gasoline prices. This report is significant as it could impact future Federal Reserve interest rate decisions.

CPI and Core CPI Predictions

The Consumer Price Index (CPI) for May is expected to show only a 0.1% rise from April, the smallest monthly increase since October. This would result in an annual increase of 3.4%. Excluding volatile food and energy prices, the core CPI is projected to rise by 0.3% month-over-month, translating to a 3.5% annual rate. While these figures are not drastically different from April’s readings, they still reflect inflation above the Fed’s 2% target.

One of the main contributors to the modest inflation in May is the significant drop in gasoline prices. Average nationwide prices for unleaded gas fell by about 18 cents per gallon to $3.61, according to Gasbuddy data. This decline has alleviated some inflationary pressures, providing consumers with much-needed relief. Economists from Bank of America Securities noted that falling energy prices in May likely contributed to the lower headline CPI.

Impact on Federal Reserve Policy

Although the expected tame inflation report for May will not immediately prompt the Federal Reserve to cut interest rates, it could pave the way for rate cuts later in the year if the trend continues. The Fed has maintained its key interest rate at a 23-year high to combat inflation, with plans to only consider cuts once inflation shows consistent progress toward their 2% target.

Focus on Core Inflation

The Fed pays close attention to core inflation, which excludes food and energy prices, as it provides a clearer picture of underlying price trends. The median forecast suggests core inflation will slightly decrease to a 3.5% annual rate in May from 3.6% in April. However, some components, like used car prices, may have seen notable increases.

Market Forecast

Given the current data and trends, the outlook is cautiously bullish. If inflation remains subdued and gasoline prices continue to decline, the Fed may consider easing monetary policy later in the year, potentially boosting stock markets and easing pressure on the US dollar. However, sustained vigilance on core inflation components is crucial for accurate forecasting.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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