May Inflation Data Shows Signs of Progress as Fed Holds Rates Steady

Key Takeaways:

• The Federal Open Market Committee (FOMC) held the federal funds rate at its current target range of 5.25-5.5 percent at its June 11-12 meeting. The newly released Summary of Economic Projections (SEP) showed the median participant now expects just one 25-basis-point rate cut by the end of 2024, down from three cuts in their March projection; and, 15 out of 19 participants projected at least one cut with 8 of those 15 projecting two rate cuts. The committee now projects a higher year-end inflation rate compared to their March estimates with no change to their projections for Gross Domestic Product (GDP) and the unemployment rate. Notably, the committee’s estimate of the federal funds rate in the long run moved up two-tenths to 2.8 percent, implying somewhat higher rates even when inflation returns to the 2 percent target.   
• The Consumer Price Index (CPI) was flat over the month in May, dropping the year-over-year comparison by one-tenth to 3.3 percent, according to the Bureau of Labor Statistics (BLS). The headline inflation rate benefitted from a 2 percent decline in energy prices, though core CPI also slowed, rising 0.2 percent over the month and 3.4 percent compared to a year ago, the lowest annual rate since April 2021. Core goods prices were flat over the month and core services prices cooled sharply to just a 0.2 percent month-over-month gain from 0.4 percent in April and 0.5 percent in February and March. This was due to an energy-price-related decline in airline fare and a surprise decline in motor vehicle insurance, which had averaged a 1.7% month-over-month gain in the first four months of the year. Both rent and owners’ equivalent rent (OER) prices remained elevated with a 0.4 percent month-over-month increase, though they continued to slowly decelerate on a year-over-year basis.
• The Producer Price Index (PPI) declined 0.2 percent over the month in May, pushing the year-ago comparison down one-tenth to 2.2 percent, according to the BLS. While this was aided by a 4.8 percent decline in energy prices, core PPI (less food, energy, and trade services) was flat over the month. Compared to a year ago, core PPI increased 3.2 percent, the same rate as in April.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index increased 0.8 points to 90.5 in May, its highest level in 2024. On net, negative 30 percent of firms expect the economy to improve, an improvement of 7 percentage points compared to April. Fifteen percent of firms plan to increase employment, an increase of 3 percentage points. Inflation (22 percent) and quality of labor (20 percent) were the two most commonly stated single most important problem facing small businesses.

Forecast Impact:

Inflation data came in below consensus and our expectations in May. The encouraging CPI and PPI reports are no doubt a step in the right direction, and we continue to believe further deceleration is in the pipelines for shelter inflation given nearly flat rent growth for new tenants. However, given the more volatile nature of some of the categories that outright declined in the CPI in May and ongoing signs of stress from inflation reported by small businesses, additional reports like this one will likely be needed to convince the Fed that inflation is returning sustainably towards their 2 percent target. This sentiment was echoed in the FOMC press conference this week, which noted that some further progress had been made but additional confidence that inflation pressures will continue to subside is still needed before cutting rates. The median number of projected rate cuts is down to just one by the end of 2024, but it was a close call. This policy stance is in line with our expectations for the Fed to take a “wait and see” approach while erring closer to less policy easing rather than more.

Nathaniel Drake
Economic and Strategic Research Group
June 14, 2024

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