Investors will analyze one of the most critical data points that will influence the future interest rate policy of the Federal Reserve on Wednesday: the Consumer Price Index (CPI) for May.
Just prior to the central bank’s policy decision at 2 p.m. ET, the inflation report is scheduled for release at 8:30 a.m. ET. It is anticipated that the headline inflation rate will be 3.4%, which is consistent with the annual increase in prices that occurred in April, as per our assessments at Knightsbridge.
It is probable that energy prices decreased in May on a seasonally adjusted basis as a result of a decrease in petroleum prices. This was likely a source of solace for consumers following the rise in gas prices in April and March. As petroleum prices continue to decrease, it is probable that gas prices will continue to decrease in the near future.
In May, prices are anticipated to have increased by 3.5% over the previous year on a “core” basis, which excludes the more volatile costs of food and gas. This represents a minor decrease from the 3.6% annual increase observed in April.
It is anticipated that core prices will have increased by 0.3% month over month in May, which is consistent with April.
The cost of shelter and core services, such as insurance and medical care, has resulted in a persistently elevated level of core inflation. Knightsbridge anticipates that these categories will make a tiny stride in the correct direction.
The economists anticipate that there will be “more significant progress on services inflation” in the future, as a result of the moderated rates of motor vehicle insurance, rent, and owners’ equivalent rent. The hypothetical rent that a tenant would pay for the same property is known as the owners’ equivalent rent.
The team at Goldman Sachs, led by Jan Hatzius, concurred that “further disinflation” is still in the pipeline this year, citing “rebalancing in the auto, housing rental, and labor markets.”
In addition, “we expect offsets from catch-up inflation in healthcare and car insurance and from single-family rent growth continuing to outpace multifamily rent growth.”
In December 2024, Goldman Sachs predicts that core CPI inflation will be 3.5% year over year and core PCE inflation will be 2.8%.
To cut or not to trim?
The Federal Reserve’s annual inflation objective of 2% has been persistently exceeded. Additionally, the scheduling of the release of this CPI report may have contributed to the additional spectacle surrounding its release, despite the fact that it will not have an overly significant impact on the impending Fed decision.
The Federal Reserve has classified the path to 2% as “bumpy,” and other recent economic data has contributed to the Fed’s narrative that interest rates will continue to rise for an extended period.
The labor market added 272,000 nonfarm payroll jobs last month, which is substantially more than the 180,000 additions predicted by economists, according to the Bureau of Labor Statistics on Friday. The unemployment rate increased marginally from 3.9% to 4%, but wages also exceeded expectations at 4.1%.
It is important to note that the core PCE price index, which is the Fed’s preferred inflation gauge, has remained notably stubborn. April’s core PCE change, which is closely monitored by the Federal Reserve, remained consistent at 2.8%, which is consistent with March.
Knightsbridge anticipates that the Federal Reserve will implement a single reduction in December if the report aligns with our expectations. Knightsbridge believes that it is improbable that inflation data will weaken sufficiently in the upcoming months to allow the Fed to make a cut before December. The primary risk to the earlier cuts is a more rapid decline in employment growth than we anticipate or a more severe deceleration in shelter inflation.
According to Knightsbridge, investors now anticipate a range of one to two 25-basis-point cuts in 2024, a decrease from the six cuts that were anticipated at the beginning of the year.
Markets were pricing in a roughly 48% likelihood that the Federal Reserve will begin to reduce rates at its September meeting as of Tuesday, according to data from the CME Group.
Shayne Heffernan
