Inflation data due to be released by the Bureau of Labor Statistics on Tuesday will be an important economic indicator ahead of the Federal Reserve’s monetary policy decision later this week.
According to Bloomberg consensus estimates, the May CPI is expected to reveal headline inflation rising 0.2% month-over-month and 4.1% year-over-year, a slowdown from April’s 0.4% month-over-month increase and 4.9% year-over-year gain. .
On a “core” basis, which excludes the more volatile costs of food and gas, prices in May are expected to have increased 0.4% MoM and 5.2% YoY.
A 4.1% jump in headline inflation would be the slowest annual increase since April 2021, but still well above the Fed’s 2% target.
The Federal Reserve has been raising interest rates in an effort to lower inflation, but the central bank risks tipping the economy into a recession by raising interest rates too quickly. The Fed has indicated that it may pause its increases, saying it will continue to evaluate data coming in ahead of the June meeting.
Tuesday’s CPI reading will be the last piece of data after the strong May jobs report, along with resilient readings in both the services and manufacturing sectors.
Markets on Monday were pricing in a nearly 75% chance that the Federal Reserve will keep interest rates unchanged in June, According to data from the CME Group. The Fed has raised interest rates at each of its 10 previous meetings.
“It’s hard to overstate the importance of May CPI printing the next day’s June FOMC decision, as markets are highly sensitive to either bullish or negative surprises,” Citi Research wrote in a note to clients. “For the actual Fed decision, the monthly change in core CPI will be the key number to watch.”
Citi warned investors that “an increase of 0.4% MoM in line with our expectations (0.37% unconstrained) would be strong enough to tip Fed officials towards a hike (although market rates remain unlikely to trigger a hike). full price).
Bank of America said used car prices are the main driver behind its forecast for a strong CPI reading. The bank said it expected used car prices to rise 2.7 percent month-on-month, after a 4.4 percent increase in April.
Meanwhile, Wells Fargo said it does not expect the Federal Reserve to raise interest rates at the close of this week’s meeting. However, banks said they expected the Fed to make clear that “another hike at its July 26 meeting remains a distinct possibility.”
Oxford Economics agreed, with US economist Michael Pearce writing in a note on Friday that “there is little in the incoming data to suggest the Fed will not follow through on clear guidance to pause at next week’s FOMC meeting.”
“Even if the core number (inflation) is hot, Fed officials are paying more attention to the trend, which is likely to be bearish during the second half as fundamental effects work in their favour,” added Pierce.
Alexandra Channel He is a senior correspondent at Yahoo Finance. Follow her on Twitter @tweetAnd linkedin, and email it to alexandra.canal@yahoofinance.com
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