The highly anticipated release of the US Consumer Price Index (CPI) for May is set to occur tomorrow (Wednesday) at 15:30 Israel time, during the Shavuot holiday. This crucial figure holds significant importance for markets and the American central bank, the Federal Reserve (Fed).
In the first three months of this year, CPI figures have repeatedly exceeded expectations and stifled the Fed’s plan to lower interest rates. Last month, for the first time in 2023, CPI aligns with market forecasts when it indicated an annual inflation rate of 3.4%. However, this may not be enough to satisfy market demands.
This time around, forecasts anticipate a monthly increase of 0.1%, meaning the annual rate will remain unchanged – 3.4%. The core inflation index (minus food and energy) may provide some relief as it is predicted to decrease by one tenth of a percent, bringing the annual rate in this index down to 3.5%. Still, interest rates in America may not drop as much as planned or hoped for at the start of the year due to inflation disruptions. Initially, the Fed planned four cuts and was expecting more from markets since interest rates are still at a record-breaking high – 5.5% at its upper limit. But due to inflation concerns, only one cut is now predicted to take place in September with a probability of approximately 50%.
Federal Reserve officials are taking a cautious approach to lowering interest rates even if CPI data comes out in line with or below expectations as it remains far from their price stability target set at 2%. The unemployment rate was slightly higher than expected in May’s employment report but job growth surpassed expectations while wages rose too. This mixed picture has affected market expectations for interest rate reductions further.
The price level in America remains high despite these challenges for the Fed who must decide whether they can lower rates aggressively without risking recession or maintain caution with their decisions on interest rates. The Fed’s upcoming interest rate statement will provide updated inflation forecasts and insights into future cuts after CPI data release later today.
