Inflation slowed in May, good news for consumers and the Fed

Just hours before the Federal Reserve’s latest interest rate decision was announced, new inflation data showed price increases slowing significantly in May.

The new report is a sign that inflation is cooling again after proving stiff in early 2024, and it could help Fed officials determine a future path for interest rates. Policymakers had embraced a rapid slowdown in price increases in 2023, but have become more cautious after inflation stagnated early this year. The latest data could help restore their belief that inflation is on track to return to the central bank’s target.

Here’s what you need to know:

• Overall inflation has cooled: The consumer price index for May was 3.3 percent higher than a year earlier, lower than the 3.4 percent that economists had forecast and lower than the April reading. And if you compare the prices of May only with the previous month, they did not increase at all.

• Core inflation also slowed: A closely watched measure that takes out volatile food and fuel prices to give a sense of the underlying trend, rose 3.4 percent from a year earlier, up from 3.6 percent the month before , and slower than economists had predicted. That was the slowest rate of increase since April 2021.

• This could be a big change for the Fed. Central bankers will announce their interest rate decision at 2 p.m. CET and while they are widely expected to leave interest rates unchanged this month, the new inflation data could help shape their forecasts for the rest of the year. Policymakers will release their first economic forecasts since March, along with their policy statement. This report could pave the way for earlier rate cuts.

• What economists say: “This is kind of nice, but it’s only one month,” said Michael Feroli, chief U.S. economist at JP Morgan. He said it is unlikely the Fed will cut rates this summer based on this inflation report alone. He expects a rate cut in November, but after Wednesday’s report he could see a preview before September. “This certainly fits into the ‘bumps in the road’ narrative,” he said, explaining that the stubbornness of inflation in early 2024 now appears less of an enduring problem.

• Inflation has fallen significantly since its peak. While the current inflation rate is faster than the 2 percent that was normal before the pandemic, it is much slower than the 9.1 percent that headline inflation reached in 2022. The Fed targets inflation of 2 percent, though it defines that benchmark by personal consumption expenditures. table of contents. Data from the CPI release feeds into that report, which comes out with a longer lag — not until June 28 this month.

• Where does that cooling come from? Auto insurance price increases surprised economists by slowing sharply last month from April, and hotel and flight prices were cheaper. Rent inflation remains stubborn, but forecasters expect it to slow soon. Clothing prices fell on a monthly basis and inflation in the food sector was moderate.