Inflation slowed down in May, according to new data. Consumer prices rose 3.3% year-over-year, slightly below market expectations (CNN). When excluding volatile food and energy prices, the core CPI rose by 0.2% for the month, falling short of predictions. A 2% decrease in energy costs helped to mitigate the rise in CPI. While inflation has remained moderate, the Federal Reserve is still struggling to reach its long-term inflation targets. They face a fine line balancing interest rates and monetary supply while limiting inflation and allowing for economic growth.
Following the Federal Reserve’s report, stock futures increased in price while Treasury yields declined (CNBC). The Dow Jones Industrial Average rose approximately 250 points in morning trading, and the 10-year Treasury yield fell to 4.27%. Housing costs have continued to climb by 0.4% for the month and 5.4% over the year. The current monthly increase of 0.4% is slightly lower than previous months, while the annual increase of 5.4% remains higher compared to historical averages, reflecting ongoing affordability issues in the housing sector. The decline in Treasury yields reflects concerns about slower economic growth.
Drops in energy prices provided some protection against inflation. Gas prices dropped 3.6%, while food prices rose slightly. However, motor vehicle insurance prices have increased 20% year-over-year. Economist Robert Frick noted that rising housing costs will negate minor savings in energy. (Fox Business). Constant price increases in big-ticket items such as housing and vehicles will strain the budget of Americans beyond small drops in prices within other sectors. Over the past five years, 97% of occupation’s salaries have failed to keep up with inflation (USA today).
Upcoming inflation figures will decide the Federal Reserve’s next moves. Although it’s anticipated that they will keep the current interest rates steady for now, traders are increasingly betting on a possible rate cut in September. The market is also expecting the Fed to update its projections for GDP growth, inflation, and unemployment in light of the new CPI data (Investing).
Analysts from Bank of America believe that housing prices must decrease before the Federal Reserve cuts rates (CNBC). Other analysts believe that waiting too long to cut rates will increase the chances of a recession and economic crisis. Overall, the pressure on the Federal Reserve is mounting as economic tensions increase in America. If they move too quickly to cut rates, they risk reigniting inflation. Meanwhile, waiting too long could stifle economic growth and potentially trigger a recession. The Federal Reserve’s primary goal is to bring inflation rates down to 2%. They initially planned for three interest rate cuts in 2024 but have now changed that estimate to just one (CNN). As of now, all attention is on the Federal Reserve and its upcoming plans for action.
