U.S. inflation eases in May as key Fed decision looms

Investing.com -- U.S. consumer prices increased by less than expected on an annualized basis in May, suggesting a possible easing in price pressures that could influence how Federal Reserve policymakers see the future path of interest rates.

The Labor Department's consumer price index (CPI) rose by 3.3% last month, decelerating slightly from 3.4% in April. Economists had predicted that the figure would match April's rate.

Month-on-month, the reading slowed to 0.0% from 0.3%, cooler than expectations for an uptick of 0.1%, following a decline in gasoline prices.

Stripping out more volatile items like food and fuel, the "core" number climbed by 3.4% in the twelve months to May, below projections of 3.5% and April's level of 3.6%. On a monthly basis, underlying price growth also inched down to 0.2%, slower than predictions that it would be in line with April's mark of 0.3%, due in part to a dip in airline fares and costs for apparel and new vehicles.

The data, which was released roughly thirty minutes before the Fed reconvenes for the second and final day of its latest policy gathering, could throw a last-minute spanner into how officials at the central bank expect rates to evolve.

With the rate-setting Federal Open Market Committee (FOMC) widely tipped to keep the key fed funds rate on hold at a more than two-decade high range of 5.25% to 5.5% following the meeting, traders are paying special attention to the unveiling of the so-called "dot plot", a collection of rate path predictions from Fed officials over the rest of 2024 and beyond.

In March, the dot plot showed that most policymakers were forecasting two or three cuts this year. But, in recent weeks, several Fed members have indicated that they are in no rush to ratchet down rates, saying instead they would like to see more proof that inflation is sustainably coming down to their stated 2% target. Inflation in the first quarter came in at 3.3%, the stiffest quarterly number in a year.

However, Wednesday's softer inflation print could persuade Fed officials to predict that more than one potential cut may be rolled out by the end of 2024. According to the closely-monitored CME FedWatch Tool, markets are now pricing in two 25-basis point rate cuts this year, up from prior estimates of between one to two.

"CPI overall and core both show 'progress' toward the [Fed's] 2% goal," said Kathy Jones, Chief Fixed Income Strategist at Charles Schwab (NYSE:SCHW), in a post on X.

Analysts at Evercore ISI also argued that the report shows that "the cooling in inflation is continuing."

Fueled by bets for more slashes to interest rates this year, U.S. Treasury yields fell and stocks on Wall Street surged.