Daily Management Review

With US Inflation Declining In May, Expectations Rise For A US Fed Rate Decrease


With US Inflation Declining In May, Expectations Rise For A US Fed Rate Decrease
Because of the biggest decline in goods prices in six months and a little increase in the cost of services, U.S. monthly inflation remained steady in May, indicating that the Federal Reserve would likely begin reducing interest rates later this year.
The Commerce Department's data, released on Friday, also indicated that consumer spending increased somewhat in the previous month. The U.S. central bank may be able to orchestrate the much-needed "soft landing" for the economy, in which inflation declines without causing a recession or a rapid spike in unemployment. Underlying prices rose at the slowest rate in six months.
Traders increased their September Fed rate-cut wagers.
"This was a very Fed-friendly report that should keep the September rate cut in play, while at the same time increasing investor confidence that moderate economic growth can be maintained even as rates stay higher for longer," said Scott Anderson, chief U.S. economist at BMO Capital Markets. "The sharp slowdown in core inflation is just what the doctor needed to see to keep the economy on the soft-landing glide-path."
The personal consumption expenditures (PCE) price index showed a flat reading last month, which came after an unrevised 0.3% increase in April, according to the Bureau of Economic Analysis of the Commerce Department. For the first time in six months, PCE inflation remained constant. The largest decline in goods prices since November occurred, of 0.4%.
The costs of durable home equipment, leisure products, cars, and furniture all saw significant drops.
Petrol and other energy-related prices fell by 3.4%, marking the largest decline in the previous six months. Although food costs increased somewhat, clothing and footwear were also less expensive.
The price increases for housing, energy, and healthcare contributed to a 0.2% increase in the cost of services. Costs for insurance and financial services decreased by 0.3% after increasing for five consecutive months. These expenses have been one of the main causes of the inflation of services, along with housing.
The PCE price index grew 2.6% in the year ending in May, following a 2.7% gain in April. The inflation figures from last month were expected by experts.
Following a spike in the first quarter, inflation is now declining as domestic demand is cooled by 525 basis points of rate rises by the Federal Reserve since 2022. However, inflation is still higher than the 2% objective set by the central bank.
Although officials recently embraced a more hawkish perspective, financial markets anticipated a about 68% likelihood that the Fed's policy easing would begin in September, up from approximately 64% before the data. Since last July, the U.S. central bank has kept its benchmark overnight interest rate within the current range of 5.25% to 5.50%.
Regarding whether the Fed will continue to lower borrowing prices twice this year despite strong wage growth, economists were split. The U.S. employment data for June will be released on Friday, which may provide more insight into the direction of monetary policy.
Wall Street stocks were mostly trading higher. The dollar's value relative to a currency basket remained relatively stable. The price of US Treasury notes varied.
Last month, the PCE price index increased by 0.1%, the least amount since November, when the volatile food and energy components were excluded. After an upwardly revised 0.3% increase in April, that occurred.
It was previously reported that the so-called core PCE price index increased by 0.2% in April. After growing 2.8% in April, core inflation climbed 2.6% year over year in May, the least amount of growth since March 2021.
Over the previous three months, it increased at an annualised rate of 2.7%, decelerating from a 3.5% clip in April.
To meet its inflation objective, the Fed monitors the PCE price measures. Over time, monthly inflation readings of 0.2% are required to return inflation to goal.
Inflation for PCE services, excluding housing and energy, increased by 0.1% in May following a 0.3% increase in April. Policymakers are keeping an eye on this metric to track their success in reducing pricing pressures.
According to the study, consumer spending—which makes up over two-thirds of the U.S. economic activity—rose 0.2% in April and 0.2% last month. A 0.3% increase in services, mostly in the areas of hospital care, housing and utilities, and air travel, helped to offset spending. In April, spending on services rose by 0.4%.
Spending on apparel, footwear, recreational vehicles, and prescription drugs drove a 0.2% increase in goods spending. In April, spending on goods decreased by 0.5%.
Spending is being restrained by inflation weariness, increased borrowing prices, and the depletion of extra reserves from the COVID-19 epidemic. However, a robust labour market that continues to provide significant salary rises continues to support consumer spending. Following a 0.3% gain in April, personal income grew by 0.5%. The 0.7% increase in wages, according to some economists, should worry policymakers.
After excluding taxes and inflation, household disposable income increased by a substantial 0.5%. The rate of consumer savings increased, rising from 3.7% in April to 3.9% in May.
Following a 0.1% decline in April, spending that was adjusted for inflation increased by 0.3%. The increase in "real consumer spending" put this quarter's consumption growth on course to match the 1.5% rate of the first quarter.
As of right now, the Atlanta Fed is projecting a 2.2% growth rate in the GDP for the second quarter. In the first quarter, the economy expanded at a 1.4% annual rate.
"There was no inflation in May, but there was also no indication of the kind of soft demand - undermined by slower income growth - the Fed believes necessary to keep inflation on a low track," said Chris Low, chief economist at FHN Financial.