In a Surprise Turn, Inflation Decreased in May

In May, inflation surprisingly decreased at a faster rate than initially predicted by many forecasters. The Consumer Price Index for May, released by the Bureau of Labor Statistics, indicated that prices remained relatively stable, showing no significant increase compared to the 0.3% rise seen in April. The data revealed a 3.3% increase in prices over the past year, slightly lower than the previous year-over-year rate in April. These figures were better than the consensus expectations of economists surveyed by the Dow Jones Newswires and the Wall Street Journal.

This report may help alleviate concerns about a resurgence of inflation following unexpectedly high price increases in the first quarter of the year. The data indicates that prices have continued to decline, significantly dropping from the 41-year peak reached in June 2022 when the CPI surged by 9.1% over the previous 12 months.

Federal Reserve officials are set to meet later today and have expressed the need for economic data, particularly inflation reports, to demonstrate a clear downward trend in consumer prices towards the target of 2% annually before considering any interest rate cuts. The central bank has kept its key fed funds rate at a 23-year high since last July, resulting in increased borrowing costs for mortgages and other loans to potentially slow down the economy and curb inflation.

Prior to the release of this report, traders had priced in an 8.9% chance of a rate cut in July and a 54.4% likelihood in September, according to the CME Group’s FedWatch tool which analyzes rate movements based on trading futures data. Following the data release, these probabilities jumped to 13.9% and 56.9% respectively, indicating a shift in expectations for potential interest rate cuts in the upcoming months.