U.S. inflation has moved down from the peak levels of last summer but remains relatively high, the Consumer Price Index for May will bring an update. Markets increasingly expect the Fed to pivot to lower rates. Yet, the Fed have signaled no real intention to do so. On June 13, right before the next Fed meeting to set interest rates, we’ll see CPI figures for the month of May.
2023 Inflation Moving Lower
Inflation has been decelerating so far this year. Energy prices are falling relative to last year, and food prices are generally flat month-on-month after a previous surge. However these more volatile prices are stripped out of the core inflation that the Fed monitors, that has stayed in a 5% to 7% range. Headline inflation has come down, but the Fed worries that too much underlying inflation remains. For now, the Fed plan to hold rates high until they see clear evidence that inflation is beaten.
Inflation Nowcasts
Inflation nowcasts estimate future inflation releases based on currently observable prices. According to the Cleveland Fed’s data, headline inflation is expected to rise 0.2% for the month. Still, stripping out food and energy prices, monthly prices are estimated to move up 0.45%. If that estimate holds it’s a similar story to much of 2023 so far. Headline inflation may move lower, but much of that move is due to energy prices and underlying inflation remains worryingly sticky from the Fed’s perspective.
Shelter Costs
However, it will be important to monitor shelter costs. These might be the reason core inflation ultimately moves down, since they carry a large weight in the CPI. Home prices have been trending broadly lower, albeit with volatility. Shelter costs are rising at 0.4% monthly and over 8% annually on the most recent figures for April. Industry sources such as Zillow and Redfin now show prices here slowing to well under 8%, but the CPI uses a different methodology for housing costs. This likely introduces lags to their estimate of home prices and rents.
Other Measures
CPI is not the only inflation metric the Fed looks at. We’ll see an update to the Personal Consumer Expenditure Price Index on May 26. Producer Price Indices measuring wholesale prices have been more subdued, rising at a 2.3% annual rate to April 2023, much closer to the Fed’s target rate for inflation, in an encouraging sign. However, the CPI often attracts a lot of attention as the earliest of those three inflation releases during the calendar month.
Jobs
Over the coming months it’s possible that inflation becomes less central to the direction of markets. That could occur if the employment situation weakens. That would force the Fed into more of a trade-off given its dual mandate to maintain both high employment and stable prices. Currently, the goal of stable prices is getting the Fed’s attention and has prompted a historical rapid series of rate hikes. However, if the jobs market weakens and the prospects of recession rise, then the Fed’s task becomes harder. So far the jobs market has remained very robust, but recent data has shown an uptick in jobless claims.
Expect inflation to trend lower with the next set of CPI numbers for May, but the Fed will likely remain skeptical that inflation is beaten.
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