May’s inflation report was cooler than economists had predicted, boosting confidence in the Federal Reserve’s ability to steer the annual price index variation back toward its 2% target.
The headline inflation rate decelerated to 3.3% year-over-year in May 2024, down from the previous and forecasted 3.4%.
The flat monthly reading of the overall Consumer Price Index (CPI) basket is particularly encouraging. It indicates a sharp deceleration from April’s 0.3% pace.
What do these inflation readings imply for Federal Reserve policy and Chair Jerome Powell‘s stance? How might they influence expectations of an upcoming easing cycle?
Benzinga gathered insights from six financial experts ahead of the June Federal Open Market Committee (FOMC) meeting:
Bank of America Sticks To One-Cut Call
“The May CPI report was undeniably soft with core and headline printing below expectations,” said Michael Gapen, U.S. economist at Bank of America. He noted that the moderation in core inflation provides more evidence that the first quarter was an outlier and that disinflation remains on track.
Gapen believes the report supports the narrative that the first-quarter inflation data was more noise than signal, suggesting that inflation should continue its downward trend.
“The report fits our view of today’s FOMC where we expect Powell to remain confident that a supply shock, cooling demand, and modestly restrictive policy will keep inflation trending lower and the Fed biased to cuts,” he added.
Gapen does not expect a September Fed cut but acknowledged that market pricing is slightly more optimistic. Bank of America retains its outlook for the Fed to begin its cutting cycle in December.
Comerica Expects A Rate Cut In September, Followed By Another In December
Bill Adams, chief economist at Comerica Bank, observed that prices were elevated in the early spring due to headlines about the war in the Middle East but dipped in May as demand weakened more than expected. “Annual core CPI is down to the least since mid-2021,” he said.
Adams noted that inflation’s return to the Fed’s target made progress in May after a setback in the early months of 2024. “The Fed will be glad to see inflation slow in this report, but they will wait for clearer progress toward their inflation target before they start cutting interest rates,” he explained.
Comerica forecasts that the Fed will hold interest rates steady at the upcoming decisions in June and July, then start cutting interest rates in September with a quarter percentage point reduction, followed by another cut in December.
A Long-Awaited Easing In Housing Costs
Joe Brusuelas, chief economist at RSM US LLP, highlighted that gradual disinflation is reasserting itself and is expected to continue throughout the summer.
“This should play into the Federal Reserve's forecast, which points to a September rate cut as both the consumer price index and the personal consumption expenditures index inch back toward the Fed's long-term 2% inflation target,” he said.
Brusuelas mentioned that housing costs, which have been a concern, are starting to ease. “We are starting to observe the long-awaited easing in housing costs,” he added, noting that the rate of increase in housing costs has slowed compared to a year ago.
He believes that the encouraging May CPI data is likely the first in a series of constructive inflation reports that will define policy normalization at the Fed. “Gasoline prices peaked in March, and a rising supply of global crude should provide a much-needed assist in the disinflation process,” Brusuelas explained.
Broad-Based Disinflation
“The softness in the report was broad-based as disinflation came through many parts of the service sector, which was exactly what the Fed was looking for,” Charlie Ripley, senior investment strategist for Allianz Investment Management, stated.
The expert highlighted declines in prices for airfares, hotels, apparel, and new cars, despite the persistence of shelter price stickiness.
Ripley noted that today’s inflation data should bolster Powell’s confidence and that of the other voting members.
“More importantly, as we look further out on the calendar, the distance from here to the first rate cut of the cycle appears to be rapidly approaching,” he concluded.
Long Road Ahead
Alex McGrath, chief investment officer for NorthEnd Private Wealth, offered a tempered view, stating, “Sure, there can be a small celebration about the progress we have made, but the fact remains that three years into this cycle, inflation is still running at 3.3% year-over-year, well above the target.”
McGrath emphasized that if the Fed’s goal is to keep rates restrictive until inflation returns to target, “we have many miles to go before we can rest.”
Cautious Optimism
Quincy Krosby, chief global strategist for LPL Financial, expressed cautious optimism, stating, “Today’s CPI report—at long last—suggests that the disinflationary trajectory has begun to edge lower towards the Fed’s price stability target.”
She believes this should help the FOMC, which is preparing its dot plot and statement, to offer a more positive view on monetary easing.
“Despite invoking their well-practiced reminder that they remain data dependent and require additional confirmation that inflation continues to trend lower,” Krosby added.
Tickers To Watch: Markets reacted positively to the inflation news. Stocks and bonds rallied. The SPDR S&P 500 ETF Trust SPY and the iShares 20+ Year Treasury Bond ETF TLT were 1.2% and 1.6% higher, respectively, by 10:50 a.m. ET.
Image: Midjourney
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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