Quick Bites | US Inflation Falls to 3.3%

US inflation fell to 3.3% in May, raising expectations of a September interest rate cut and delivering a boost to the stock market. The 3.3% rise in the headline consumer price index (CPI) compared with a Reuters survey that expected the rate to remain at 3.4%. Core CPI, which strips out changes for food and energy prices, hit 3.4%, below expectations of 3.5%. The data also showed month-on-month headline inflation was zero.

Source: Financial Times

The data, issued on Wednesday 12 June, hours before US Federal Reserve (Fed) officials outlined their plans for rate cuts this year, was marginally better than economists’ expectations. After the Fed decision, traders in the futures market placed the probability of a September rate cut at around 60%. The S&P 500 gained 0.9% to close at a record high. The Nasdaq Composite gained 1.5% to also close at a record high.

In Fed chair Jay Powell’s press conference, he discussed the decision to keep borrowing costs on hold at their 23-year high of 5.25-5.5% and the central bank’s “dot plot” projected that it would cut rates just once in 2024.

While the Fed’s preferred inflation gauge is the personal consumption expenditures figure, CPI data still has an effect on the central bank’s approach to cutting rates. The two-year Treasury yield, which moves with interest rate expectations and inversely to its price, was down 0.07% at 4.76%, but had traded as low as 4.67% on the release of the data.

There are still signs of “lingering strength in pricing power”, notably in housing costs and medical care prices, according to the chief economist at ING. But the report overall, was “good news” in the Fed’s fight to tame inflation. “This needs to become the trend after a series of far too hot readings at the start of the year. We think it will be, and with unemployment on the rise we expect the Fed to cut rates in September.”