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With the Federal Reserve determined to bring inflation down, May’s consumer price index, to be released on Tuesday, will give the central bankers fresh data on how much progress they’ve made in their mission to bring inflation down to 2%.
The report will come out just as the Federal Open Market Committee begins its two-day monetary policy meeting that will end on Wednesday, with the announcement of its rate decision.
The Fed is expected to keep rates unchanged at 5.00%-5.25% at the meeting, which would break its 10-meeting string of rate hikes. But there’s still a 25% chance that the Fed will raise its rate by 25 basis point, according to the CME FedWatch tool.
The headline CPI is expected to slow to a 0.2% M/M increase from its 0.4% advance in April. The progress looks even better on a Y/Y basis, with CPI growth expected to moderate to 4.1% from 4.9% growth in April.
But excluding food and energy, the core CPI is expected to rise by 0.4% M/M, unchanged from April’s rate, showing just how sticky inflation is. On a Y/Y basis, core CPI is anticipated to rise 5.3%, down from 5.5% in April.
Generally, though, the Fed officials prefer to look at personal consumption expenditures because that takes into effect the changes consumers make in response to higher prices. For example, people may trade down to store-brand products rather than stick with higher price name brands.
The CPI measures the prices of a set basket of goods, while the PCE measures what consumers are actually spending. The PCE report for May won’t come out until June 30. So the Fed won’t have that data to incorporate into its view of the U.S. economy.
SA analyst Damir Tokic sees a long and bumpy road to the Fed’s 2% inflation goal. “The disinflationary process in services and shelter has started, but from a very high level, and very gradual,” he said. “The return to the 2% inflation target is unlikely without a deep recession with a significant increase in the unemployment rate.”
He expects that the Fed will continue raising rates until “there is obvious economic damage.”