Cooling inflation ignites hope of rate cuts
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It's starting to feel a little bit like late 2023: For the second straight month, the Consumer Price Index was cooler than expected — a sign that inflation might be back on a downward path.
Why it matters: The first few months of the year stoked fears that price pressures were reaccelerating. So far, the second quarter appears much different — with a soft landing path for the economy looking like a reality.
- That could shift the tenor of Wednesday's Federal Open Market Committee meeting and make officials more comfortable penciling in two rate cuts this year in their projections. The first rate cut could be in September, if that scenario comes true.
- Stocks and bonds were both rallying Wednesday morning upon the news.
What they're saying: "Inflation's return to the Fed's target took two steps forward in May after one step back in the opening months of 2024," Comerica's Bill Adams wrote in a report.
By the numbers: The CPI was unchanged for the month of May after rising 0.3% in April. The core measure, which excludes food and energy prices, rose 0.2% — the slowest monthly pace since August 2021.
- Year-over-year inflation edged down as well, to 3.4% from 3.5%.
- Core CPI is up an annualized 3.3% over the past three months, the lowest since October.
The intrigue: Some categories where price increases were feared to be sticky showed the opposite in May.
- Car insurance, for instance, fell slightly by 0.1% after two consecutive months of rapid gains. (The category is still up more than 20% from a year ago.)
But the long-awaited decline in rental prices (already observed in private data) still hasn't shown up in the CPI report.
- Owner's equivalent rent, which the government uses to account for inflation in homes that people own, rose 0.4% for the third month.
The big picture: The report won't alter the Fed's likely decision to keep interest rates unchanged this afternoon. But it might provide some of the evidence they want to see of normalizing inflation.
- That is, at least, the obvious sentiment in financial markets Wednesday. The yield on the two-year Treasury note plunged 0.13 percentage point after the report was released — reflecting expectations of lower rates.
- The CME's FedWatch tool, based on futures prices, put 61% odds on a rate cut by September — versus about 47% Tuesday.
