Energy-Driven CPI Drop In May Contrasts With Persistent Core CPI: 5 Economists Speculate On Fed's Next Move

Zinger Key Points
  • Some economists observed further evidence of disinflation, however certain items, such as shelter, continued to rise.
  • A rate pause in June is all but a done deal, but experts are divided on a July rate hike.

The inflation rate dropped faster than expected in May, coming in at 4% year-on-year against the 4.1% forecasted, and marking a substantial drop from the 4.9% reported in April, strengthening investors’ confidence that the Federal Reserve will choose to pause at its forthcoming policy meeting.

Risky assets reacted positively to the CPI report, with the SPDR S&P 500 ETF Trust SPY hitting 13-month highs, while the dollar fell.

However, core inflation, a gauge of underlying price pressures that exclude energy and food, came in at 5.3% year-on-year, somewhat higher than the 5.2% predicted by the Street, sparking some concerns that policymakers will likely wait and see before calling a halt to the rate-tightening campaign.

Five economic experts weigh in on what the May CPI report could indicate for the Fed’s future actions.

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June Is a Fed Pause, July Is Still A Question Mark

Jamie Cox, Managing Partner at Harris Financial Group, believes that the latest CPI report provides compelling reasons for the Federal Reserve to pause. According to Cox, there are signs of deflation or disinflation in every category of the report. Even traditionally stable components like rents have reached a critical point. Cox anticipates that while there may be some dissenting voices advocating against a pause, the Fed is likely to proceed in that direction.

According to Charlie Ripley, Senior Investment Strategist at Allianz Investment Management, the goods side of the inflation basket demonstrated continued strength, particularly with the rise in used car prices, while there were encouraging signs from the service sector, such as declining airfares.

Ripley believes that this data should provide the Federal Reserve with justification to pause at tomorrow’s meeting. However, he points out that the sustained core inflation above 0.4% for the sixth consecutive month raises questions about the necessity for further rate hikes and keeps the possibility of another hike at the July meeting open.

According to Oliver Rust, head of product at independent inflation data aggregator Truflation, the latest inflation figures will be a significant topic of discussion for the Federal Open Market Committee during its meeting today and tomorrow. Rust argues that anything other than a pause in interest rate hikes at this stage could pose a risk to economic stability, considering the substantial pressure the U.S. economy is currently facing.

He highlights that if GDP growth continues to decline in the second quarter, the U.S. could be on unstable ground, necessitating the Central Bank’s shift from reducing inflation to avoiding a recession, especially with the upcoming 2024 presidential election campaign. Rust believes that maintaining interest rates at their current levels would be a realistic approach to achieving this goal, but higher rates could potentially become a tipping point.

Inflation is nearing the Federal Reserve’s target, but some prices remain stubbornly high, according to Jeffrey Roach, chief economist for LPL Financial. While shelter costs contributed to the rise, energy prices saw a significant decline.

Prices at restaurants continue to climb, indicating strong consumer demand for experiences. These encouraging trends give the Federal Reserve flexibility to keep interest rates unchanged for now, and if they persist, rate hikes may not be expected for the remainder of the year.

Chris Zaccarelli, Chief Investment Officer of Independent Advisor Alliance, believes that although inflation is still high, the Federal Reserve is prepared to pause its interest rate hikes. The Fed wants to assess the impact of its previous actions on inflation before making further moves.

Read now: El-Erian Sees Fed Having Three Primary Options For Interest Rates Ahead, Believes None Is Optimal

Photo: Shutterstock

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