Consumer price index data for May showed that core inflation cooled more than expected last month. S&P 500 futures moved higher in Wednesday stock market action after the CPI inflation data, as markets turned their focus to the rate-cut outlook that the Federal Reserve will update at 2 p.m. ET.
CPI Inflation Report Hits And Misses
The overall consumer price index was unchanged on the month vs. +0.1% forecasts. The 12-month CPI inflation rate unexpectedly dipped to 3.3% from 3.4%.
The core CPI, which strips out volatile food and energy prices, rose 0.2% vs. April levels, cooler than 0.3% forecasts. The annual core CPI inflation rate unexpectedly fell to 3.4% from 3.6% in April, below 3.5% predictions. The core CPI inflation rate peaked at a 40-year-high 6.6% in September 2022.
On an unrounded basis, the core CPI inflation data looked even better, with just a 0.16% monthly increase.
Core goods prices were unchanged on the month, as apparel prices dipped 0.3%. New vehicle prices fell 0.5%, the biggest decline since April 2020, just as the Covid shock was first hitting.
Core service prices rose just 0.2%, the smallest monthly increase since September 2021. The biggest factor was a 0.9% monthly drop in transportation services prices, the steepest decline since September 2021. Airline fares fell 3.6%.
Prices for recreation services fell 0.2% as prices for cable, satellite and streaming services slid 1.2% — the biggest decline since June 2005.
Will CPI Impact Today's Fed Meeting?
Coming just ahead of the Fed meeting, the obvious question is whether a CPI surprise could shift Fed projections. It's possible, because a hawkish outlook would come as an even bigger shock. Still, keep in mind that the CPI has a lot of differences from the Fed's primary inflation rate, the core PCE price index.
We'll have a much better idea after Thursday's producer price index release whether core PCE inflation will be similarly tame in May. Some PPI data feed directly into PCE inflation, including health care services, which is the biggest component of the core PCE price index.
Fed policy isn't generally moved by a single month of data. Policymakers have said it will take a number of months to gain the confidence that inflation is on a path back to the 2% target, but the May CPI data is a great start.
Fed Meeting: New Rate-Cut Projections Due
All the suspense around today's Fed meeting centers on the quarterly rate-cut projections that will be released at 2 p.m. ET. The new projections are expected to pencil in 50 basis points in rate cuts this year, keeping a September rate cut in play. There's an outside chance that the Fed signals just one quarter-point move, but that seems less likely after the CPI data.
Either way, the Fed rate-cut outlook — which reflects the median of individual projections made by each policymaker — is likely to show a very divided Federal Open Market Committee, or FOMC.
The last batch of projections in March indicated that 10 committee members were forecasting three quarter-point cuts, while nine members saw two rate cuts or fewer. However, Fed Chair Jerome Powell's comments made clear that he was holding the narrow majority together.
If June-meeting projections show just one rate cut, that would mean that either Powell has become more hawkish or has lost control of his committee. Neither seems likely.
Fed Rate-Cut Odds
After the CPI inflation data, markets were pricing in 73% odds of a rate cut by the Sept. 18 Fed meeting, up from 54% ahead of the CPI. Markets now see 71% odds of two quarter-point rate cuts before the end of this year, up from 51%.
S&P 500
The S&P 500 opened 0.8% higher after release of May CPI inflation data. The S&P 500 rose 0.3% in Tuesday stock market action, hitting the 27th record closing high this year.
The 10-year Treasury yield plunged 12 basis points to 4.28%.
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