The Federal Open Market Committee will analyze May’s Consumer Price Index data closely to determine if inflation is trending toward their 2% target. The CPI release will come on the morning of June 12, the same day as the FOMC’s next scheduled interest rate decision announcement. Interest rates are expected to be held steady at that meeting, regardless of the CPI figures, but the data could help inform potential rate cuts later in 2024.
CPI Nowcasts
Nowcasts see May CPI inflation at a relatively low 0.08% monthly rate. However, that projection is likely in part due to falling oil prices for most of May. Once the impact of food and energy is removed, the nowcast projects a less encouraging 0.3% increase in core CPI.
That wouldn’t necessarily ring alarm bells at the FOMC, but nor would it provide real encouragement that inflation is moving toward 2% in the near term. The previous CPI report for the month of April did show a 0.3% monthly increase for both headline and core inflation.
Data To Watch
Within the CPI release, shelter costs are likely to be closely watched. These carry a large weight in the construction of the index and are generally expected to decline following industry benchmarks at a some point, though that has not occurred clearly in the CPI series yet. If shelter costs were to see some disinflation that could be sufficient to put inflation on a glide path to 2%. Elsewhere, the FOMC has been particularly attentive to trends in services prices, which have remained elevated and vehicle costs have seen absolute declines for much of 2024, helping pull inflation lower.
Employment Data Matters Too
Though inflation data is closely watched given its previous surge, the FOMC has also signaled that it is watching employment data closely. So far the jobs market has remained robust according to the Federal Reserve. However, with inflation now at annual rate of around 3%, the FOMC might be tempted to cut interest rates if they fear the jobs market could weaken. That could occur even if inflation appears trendless. Unlike the recent history of inflation figures, the job market can turn quite quickly. For example, the yield curve is well-regarded recession indicator and has been signaling recession risk for some time. Still for now, the Fed has confidence in the jobs outlook.
Likely Interest Rate Moves
If May’s core monthly CPI inflation is at 0.3%, that could keep the FOMC on course for at least one interest rate cut in 2024. Currently, one or two rate cuts are expected.
However, if core inflation were to accelerate again to a 0.4% monthly rate, as seen in the core monthly CPI report for January to March, that would trigger some concern. Currently the fixed income markets imply a 20% chance of no interest rate cuts in 2024, according to the CME FedWatch Tool, and that probability could increase.
Equally the markets would welcome a monthly CPI result of 0.2% or below for May, depending on underlying trends, that might increase speculation that we could still see two or more cuts in 2024. Nonetheless, the FOMC will react to the totality of incoming economic data and there will be several more CPI reports before the FOMC’s September 18 decision. That’s when the markets see a realistic possibility that a first interest rate cut could come.
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