Inflation data set to be released by the Bureau of Labor Statistics on Tuesday will be a critical economic indicator ahead of the Federal Reserve’s monetary policy decision later this week.
According to Bloomberg consensus estimates, May’s Consumer Price Index (CPI) is expected to reveal headline inflation rose 0.2% over last month and 4.1% over the prior year, a slowdown from April’s 0.4% month-over-month increase and 4.9% annual gain.
On a “core” basis, which strips out the more volatile costs of food and gas, prices in May are expected to have climbed 0.4% over the prior month and 5.2% over last year.
A 4.1% jump in headline inflation would be the slowest annual increase since April 2021, but would still be significantly above the Federal Reserve’s 2% target.
The Fed has been raising interest rates to try to bring down inflation, but the central bank risks sending the economy into a recession by hiking rates too high too fast. The Fed has signaled it could pause its hikes, saying it would continue to assess incoming data ahead of the June meeting.
Tuesday’s CPI print will be the last piece of data following a strong May jobs report, coupled with resilient readings on both the services and manufacturing sectors.
Markets on Monday were pricing in a roughly 75% chance the Federal Reserve keeps rates unchanged in June, according to data from the CME Group. The Fed raised interest rates at each of its previous 10 meetings.
“It is hard to overstate the importance of the May CPI print for the June FOMC decision the following day, with markets highly sensitive to either upside or downside surprises,” Citi Research wrote in a note to clients. “For the actual Fed decision, the month-on-month change in core CPI will be the key figure to watch.”
Citi warned investors, “A 0.4% MoM increase in line with our forecast (0.37% unrounded) would be strong enough to tip the scales for Fed officials towards a hike (although market pricing would still be unlikely to fully price a hike).”
Bank of America said used car prices are a key driver behind its forecast for a strong core CPI print. The bank said it expects used car prices to rise 2.7% month-over-month, following a 4.4% increase in April.
Wells Fargo, meanwhile, said it does not anticipate the Fed to raise rates at the conclusion of this week’s meeting. However, the banks said it does expect the Fed to make clear “another hike at its July 26 meeting remains a distinct possibility.”
Oxford Economics agreed, with lead US economist Michael Pearce writing in a note on Friday that “there is little in the incoming data to suggest the Fed will not follow through on the clear guidance for a pause at next week’s Federal Open Market Committee meeting.”
“Even if the core [inflation] number comes in hot, Fed officials are paying more attention to the trend, which is likely to be downward over the second half as base effects work in their favor,” Pearce added.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected]
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Source: https://finance.yahoo.com/news/cpi-preview-inflation-expected-to-have-cooled-further-in-may-ahead-of-fed-decision-164517988.html