Flat: Consumer prices were unchanged in May, marking the first flat month since July 2022. Year-over-year consumer price growth slowed to 3.3%, the lowest level since February.
Three-Year Low: Core price growth year-over-year slowed to 3.3%, the lowest level since April 2021, indicating a broader cooling of inflationary pressures.
Impact on Market Expectations: The better-than-expected inflation data caused bond yields to fall, with the 10-year yield dropping below 4.30%. This has significantly shifted market expectations, with a 70% chance of a Fed rate cut in September now predicted, reflecting increased confidence that inflation is being controlled.
It doesn’t get much better than this! Inflation took a notable breather in May, with consumer prices remaining flat, marking the first month without an increase since July 2022, according to the latest data from the Bureau of Labor Statistics. This cooling inflation has caused bond yields to fall and has influenced expectations for future Federal Reserve rate cuts.
- M-O-M: Consumer prices were unchanged in May, a significant drop from the 0.3% rise seen in April. This marks the first month without an increase since July 2022.
- Y-O-Y: Consumer price growth slowed to 3.3% in May, down from 3.4% in April, hitting the lowest level since February.
The slowdown in consumer price growth suggests that inflationary pressures are easing, which could provide some relief to consumers and policymakers alike.
Food & Energy: Food prices increased slightly by 0.1% for the month, which brought the annual index down to 2.1%. This is a decrease from the 2.2% observed over the last two months and the lowest level since March 2020.
- Energy prices, on the other hand, fell by 2.0% in May but were still up 2.6% compared to the same time last year, marking the highest levels since February 2023.
The Core: Core consumer prices, which exclude the volatile food and energy sectors, rose by 0.2%, down from the 0.3% increase in April. This is the smallest increase since June 2023. Year-over-year core price growth slowed to 3.3%, down from 3.4% in April and the lowest level since April 2021.
Notable Drops: New car prices fell by 0.5% in May as did transportation services. Apparel was down 0.3% from Apil.
Housing Costs: Shelter costs, however, continued to rise, increasing by 0.4% for the fourth consecutive month. Despite this monthly increase, the year-over-year growth in shelter costs slowed to 5.4%, the lowest level since April 2022.
Beat The Street: The better-than-expected inflation data had an immediate impact on the financial markets. Bond yields fell by twelve basis points, with the 10-year yield dropping below 4.30%. This decline in bond yields reflects increased confidence among investors that inflation is being brought under control, reducing the need for aggressive monetary tightening by the Federal Reserve.
- Market expectations for Federal Reserve policy have shifted notably. The CME FedWatch Tool now indicates a 70% chance of a rate cut in September, a significant increase from previous forecasts. Additionally, only 4% of traders now believe that the current interest rate will be maintained through the end of December’s meeting.
In summary, the cooling inflation in May has set a positive tone for the economy, easing concerns about persistent inflation and opening the door for potential rate cuts by the Federal Reserve later this year. This development is likely to have broad implications, influencing everything from consumer spending to investment decisions in the coming months.
