Fed Rate Pause Set to Get Support From Moderating Inflation Data

(Bloomberg) — Federal Reserve officials seeking to put their tightening campaign on pause this week are set to receive support from consumer price index data due Tuesday, according to Bloomberg Economics.

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Falling energy prices in May should offset increases in other categories to leave the headline index roughly unchanged, Anna Wong, Bloomberg’s chief US economist, wrote Monday in a preview of the report. Excluding food and energy, prices probably rose 0.3% — a deceleration from April’s 0.4% increase, she said.

Such monthly increases would result in moderation in year-over-year inflation rates for the headline and “core” indexes, which ought to be enough to keep the US central bank’s Federal Open Market Committee from opting for an 11th-straight increase in its benchmark interest rate at the conclusion of a two-day policy meeting on Wednesday.

“The fast decline in year-over-year CPI readings may provide fodder for dovish-leaning FOMC officials or analysts who want the Fed to end the hiking cycle,” Wong said. “Barring a very positive surprise in the May CPI report, the FOMC will likely put the policy rate on hold at the June meeting.”

Here’s what Bloomberg Economics is expecting:

Headline CPI inflation should decelerate to 4.0% in the 12 months through May, from 4.9% prior, mainly due to large negative base effects, as elevated oil prices last year following Russia’s invasion of Ukraine roll out of the 12-month window. Core inflation should slow to 5.2% from 5.5%.
Inflation in some goods, including new vehicles, will likely have slowed even as prices of used cars advance.
Core services inflation could ease to the slowest monthly pace since September 2021, led by disinflation in rents and owners’ equivalent rents.

The Bloomberg Economics projections are slightly below the consensus estimates in a Bloomberg survey of outside forecasters, who see headline CPI rising 0.1% and core CPI rising 0.4%.

Where there’s more agreement is on the broad path forward for price pressures in the US, with many expecting the moderation in inflation rates to pick up steam going forward.

Economists at Goldman Sachs Group Inc. wrote in a note Monday that they expect month-over-month core CPI inflation to march downward in the months ahead as prices of used cars resume their declines and rental inflation slows.

“We expect month-over-month core CPI inflation to come down to around 0.25-0.30% later in the second half of 2023,” Goldman’s Spencer Hill and Manuel Abecasis said in the report. “We forecast year-over-year core CPI inflation of 4.2% in December 2023 and 2.8% in December 2024.”