The annual pace of US inflation is likely to have slowed to its lowest level in more than two years, but ongoing price pressures are likely to force the Federal Reserve to consider further rate hikes.
According to a consensus forecast compiled by Bloomberg, the consumer price index is likely to have risen 4.1 percent year-on-year in May. That would be far slower than the 4.9 percent increase recorded in April and marks the lowest level since March 2021. On a monthly basis, consumer prices are estimated to have risen just 0.1 percent.
However, once you factor out volatile commodities like food and energy, the “core” CPI is likely to have risen another 0.4 percent in May – matching the rise in April. That would equate to a 5.2 percent annual increase in CPI.
The report will be released by the Bureau of Labor Statistics on Tuesday, just before the Fed begins its two-day policy meeting. The Federal Open Market Committee is widely expected to refrain from raising interest rates this week after 10 consecutive moves since March 2022, but will keep the door open for further tightening this year if the data warrants it.
In a recent speech, Fed Governor Philip Jefferson backed the idea of a pause, saying it would give officials time to assess incoming data, the impact of the Fed’s rapid monetary tightening over the past 15 months and the fallout from the recent bank stress.
Additionally, Jefferson, who has been named the next Fed vice chairman by the Biden administration, stressed that a pause in June “should not be interpreted as meaning that we have reached the peak interest rate for this cycle.”
Some officials have signaled they don’t think the current level of the federal funds rate, which ranges between 5 percent and 5.25 percent, is high enough to dampen demand enough to end one of the worst Curb episodes of inflation that will cripple the central bank in decades.
Recommended
New forecasts by individual officials on policy rates, inflation, growth and unemployment are expected to accompany the rate decision on Wednesday, and policymakers are widely expected to indicate at least one more quarter-point rate hike this year necessary is .
Economists recently polled by the Financial Times believe the Fed will eventually have to raise interest rates to between 5.5 and 6 percent. That points to at least two more quarter-point hikes this year.
Respondents were particularly concerned that inflation would be entrenched and even harder to eradicate.
Compared to the previous survey in March, the median estimate of the price index for personal consumption expenditure after excluding food and energy costs – the Fed’s preferred measure of inflation – rose 0.2 percentage points to 4 percent by the end of the year. In April, the annual rate was 4.7 percent, well above the Fed’s 2 percent target.