The Federal Reserve began its June meeting on Tuesday but, before getting underway, the Bureau of Labor Statistics released its latest print of the Consumer Price Index (CPI) showing a better-than-expected easing of inflation in May that's sure to factor into the Fed's Open Market Committee decision about interest rates due out on Wednesday.
According to BLS, headline CPI came in better than estimates predicted on both the monthly and annual numbers, with a 0.1 percent increase in May and a 12-month advance of 4.0 percent. For context, headline CPI inflation hit its peak last June at 9.1 percent.
CPI for all items rises 0.1% in May; shelter and used cars and trucks up https://t.co/3vaFDY5PqC #BLSdata
— BLS-Labor Statistics (@BLS_gov) June 13, 2023
Core CPI inflation — a metric that excludes the volatile food and energy indexes and is watched more closely by the Fed — came in as estimated at a 0.4 percent increase month-over-month in May for an annual increase of 5.3 percent.
BLS explained that shelter continued to make up a significant portion of still-increasing inflation while energy costs continued to subside from their high point that came last summer as gasoline prices hit their all-time highs:
The index for shelter was the largest contributor to the monthly all items increase, followed by an increase in the index for used cars and trucks. The food index increased 0.2 percent in May after being unchanged in the previous 2 months. The index for food at home rose 0.1 percent over the month while the index for food away from home rose 0.5 percent. The energy index, in contrast, declined 3.6 percent in May as the major energy component indexes fell.
Despite the better-than-expected headline number for May's CPI, there are still a number of indexes showing substantial 12-month increases. Transportation services hit 10.2 percent year-over-year in May, food away from home is up 8.3 percent, and shelter remains 8.0 percent more expensive.
Now, the Fed has to decide how to factor the latest CPI report into its interest rate decision that will be announced this week. Previous reports — including the Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge — showed inflation accelerating in the wrong direction to more than four percent, double the Federal Reserve's target inflation rate of just two percent.
The Fed could decide to keep its foot on the gas and announce another interest rate hike, as it has done at consecutive meetings for more than one year, to continue its efforts to choke spending out of the economy in pursuit of its two percent inflation goal. Or, as the Fed has done in previous times of economic tumult, hit pause at this month's meeting out of fear that another hike would push the economy too far over the edge.
As things stand now and in light of the latest PCE report and even Tuesday's CPI, it sure looks like the Fed needs to keep hiking rates to continue slowing things down after Biden and congressional Democrats' tax-and-spend agenda sent costs soaring. Yet, predictions for the Fed meeting have swung to suggest a pause is most likely to be announced, likely extending inflation's hold on American consumers who have struggled, for two years, with negative real wages as a result.
Now that CPI has been digested, probability for pause (skip?) getting close to 100%
— Liz Ann Sonders (@LizAnnSonders) June 13, 2023
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