Economic Outlook
US Inflation Cools in May, Boosting Hopes of Fed Rate Cut
The CPI held flat in May, marking the first time since November that prices did not rise
In a significant development for the U.S. economy, inflation showed signs of cooling in May 2024, raising hopes for a potential interest rate cut by the Federal Reserve later this year. The latest data from the Commerce Department and the Bureau of Labor Statistics (BLS) indicate that the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index, both key measures of inflation, remained stable or showed minimal increases, suggesting a deceleration in price pressures.
The CPI, which measures the average change in prices paid by consumers for goods and services, held flat in May, marking the first time since November that prices did not rise on a monthly basis. Year-over-year, the CPI increased by 3.3%, slightly below market expectations. This stability was largely attributed to a significant drop in goods prices, which offset modest increases in the cost of services. Notably, gasoline prices fell by 3.4%, contributing to the overall decline in the energy index by 2%.
Similarly, the PCE price index, the Federal Reserve's preferred inflation gauge, remained unchanged from April to May. Over the twelve months leading to May, the PCE price index rose by 2.6%, down from a 2.7% increase in April. Excluding the volatile food and energy components, the core PCE price index inched up by just 0.1% in May, the smallest uptick since the spring of 2020. This core measure rose by 2.6% year-over-year, the slowest increase in more than three years.
Economists and market analysts view these figures as a positive sign that inflationary pressures are easing, potentially paving the way for the Federal Reserve to consider lowering interest rates. The Fed has maintained its benchmark interest rate at 5.25%-5.50% since July 2023, following a series of aggressive hikes aimed at curbing the highest inflation levels seen in four decades.
"The latest inflation data is encouraging and suggests that the Fed's monetary policy is having the desired effect," said Robert Frick, corporate economist at Navy Federal Credit Union. "However, the Fed will likely need to see several more months of favorable data before making any decisions on rate cuts."
Consumer spending, which drives over two-thirds of U.S. economic activity, saw a moderate increase of 0.2% in May, following a 0.1% rise in April. Adjusted for inflation, real spending increased by 0.3%, indicating that consumers are still spending despite higher borrowing costs and slower wage growth. Personal income and disposable income also rose by 0.5%, contributing to a higher personal savings rate of 3.9%, the highest since January.
Federal Reserve officials have expressed cautious optimism about the recent inflation trends. Fed Governor Adriana Kugler noted that monetary policy is "sufficiently restrictive" to ease price pressures without negatively impacting the labor market. "We are seeing signs that inflation is moving towards our 2% target, but we need to remain vigilant and data-driven in our approach," she said.
Despite the positive inflation data, some Fed officials remain cautious about the timing of any rate cuts. Dallas Fed President Lorie Logan emphasized the need for patience and several more months of favorable inflation data before considering a reduction. "We must ensure that inflation is sustainably moving towards our target before making any policy changes," Logan stated.
Financial markets have responded positively to the inflation news, with stock indexes surging and bond yields dropping. Futures traders have raised the likelihood of a Fed rate cut in September, with the probability of a reduction standing at approximately 61.1%.
As the Federal Reserve continues to monitor economic indicators, the possibility of a rate cut later this year remains on the table. However, the central bank's decision will ultimately depend on the continued trajectory of inflation and other economic factors. For now, the cooling inflation in May provides a glimmer of hope for consumers and businesses alike, signaling a potential easing of monetary policy in the near future.