Consumer prices expected to remain stable as Fed assesses ‘bumpy’ impact of inflation on rate path

On Wednesday, investors will digest one of the most important data points that will shape the Federal Reserve’s future interest rate policy: May’s Consumer Price Index (CPI).

The inflation report, scheduled for release at 8:30 a.m. ET, will be released just before the central bank’s policy decision at 2:00 p.m. ET. Headline inflation is expected to come in at 3.4%, matching April’s annual price rise, according to Bloomberg estimates.

Over the past month, consumer prices are expected to have increased by 0.1%, a slowdown from the 0.3% monthly increase recorded in April. It would also be the smallest month-over-month increase since October 2023.

According to Bank of America, a decline in energy prices will likely contribute to further downward pressure on the overall CPI.

“Energy prices likely fell in May on a seasonally adjusted basis due to a drop in gasoline prices. This likely came as a relief to consumers after gasoline prices rose in April and March,” BofA economists Stephen Juneau and Michael Gapen wrote in a note to clients last week. “With crude prices falling, gas prices are expected to continue to fall in the short term.”

On a “core” basis, which excludes the more volatile costs of food and gasoline, prices are expected to have increased 3.5% in May from a year ago – a slight slowdown from last year. he annual increase of 3.6% observed in April, according to Bloomberg data. .

Core prices are expected to have increased 0.3% month over month in May, the same as in April.

Core inflation has remained stubbornly high due to rising costs of housing and basic services like insurance and medical care. But BofA expects these categories to “take a very small step in the right direction.”

“Housing inflation was likely a little firmer this month due to an increase in out-of-home accommodation prices,” Juneau and Gapen said. “However, non-shelter core services are expected to show some moderation as we consider gentler increases in several service categories.”

Over time, economists said, they “expect to see more notable progress in services inflation,” driven by moderations in auto insurance, rent and landlord-equipped rent. Landlord equivalent rent is the hypothetical rent a landlord would pay for the same property.

The Goldman Sachs team, led by Jan Hatzius, agreed that “further disinflation” remained on the agenda this year, citing “a rebalancing of the auto, housing rental and labor markets “.

Nonetheless, “we expect that offsets from inflation catch-up in health care and auto insurance and single-family rent growth will continue to outpace multifamily rent growth.”

Goldman forecasts core CPI inflation of 3.5% year-over-year and core PCE inflation of 2.8% in December 2024.

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, May 1, 2024. (AP Photo/Susan Walsh, File) (ASSOCIATED PRESS)

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