Inflation remains entrenched in the United States above 3%, but it finally gives a favorable surprise. Prices remained stable in May compared to the previous month, bringing inflation to an interannual rate of 3.3%, one tenth less than in April, according to data published this Wednesday by the Bureau of Labor Statistics. dependent on the Department of Labor. Economists expected a monthly increase in prices of 0.1% and the year-on-year rate to remain at 3.4%. Core inflation drops two tenths, to 3.4%. The data is good news for the Federal Reserve, which is in the middle of its monetary policy meeting.
During the past month, the price of gasoline fell by 3.6%, meaning its year-on-year increase is now only 2.2%. For their part, food prices increased only 0.1% in the month and are up 2.1% in a year. It is the prices of accommodation (where a large part of the rent is allocated with a certain offset), transport and electricity that contribute the most to inflation remaining far from 2%.
Apart from the direct implications for citizens’ pockets, price data has consequences on two fronts. From a political point of view, inflation has weakened the popularity of the president, Joe Biden, who sees his mandate ending without recovering the desired price stability, although the May data is a relief. Gasoline and food price increases during his term threaten his re-election chances. The other front is that of monetary policy. The Federal Reserve has undertaken the most aggressive interest rate hikes since the 1980s, but is still struggling to get sustainably closer to the 2% target.
Although the inflation indicator preferred by the president of the Federal Reserve, Jerome Powell, is somewhat below 3%, the central bank will be careful to lower rates until it has more confidence that price developments are as desired. The May inflation data is released as the second day of the two-day meeting of the Federal Open Market Committee (FOMC) of the Reserve begins, which is expected to keep interest rates in the range of 5.25%. 5.5%, the maximum in 23 years, which has been maintained since July of last year.
Poor first-quarter inflation data and the strength of the labor market led the central bank to back off rate cuts. This Wednesday, members of the Federal Reserve must update their macroeconomic projections, as they do in the last meeting of each quarter.
Fewer rate cuts
In March, its forecasts pointed to a rate cut of 0.75 points until the end of the year, that is, the equivalent of three cuts of 0.25 points, a scenario that quickly became outdated. The 18 members of the Federal Reserve that participate in the Summary of Economic Projections (SEP) provide their forecasts on economic growth, inflation, unemployment rate and interest rates.
Participants predicted in March that interest rates would drop those 0.75 points until the end of the year, reaching 4.625% (that is, in the 4.5%-4.75% band), and then lower the next year to 3.875% (3.75%-4% band), which implied an additional cut of 0.75 points, to drop again in 2026 to 3.125%. This entire roadmap will be the one that the central bank redraws this Wednesday. Analysts were divided on whether the new forecasts will see one or two rate cuts of 0.25 points until the end of the year. The recently published inflation data may contribute to there being two.
Beyond the forecasts, the market will also be attentive to the FOMC statement and Powell’s messages at the press conference. Analysts expect the mention that the committee needs to gain greater confidence that inflation is moving sustainably towards 2% before the decisive step of lowering rates will remain. At the same time, the central bank will continue to insist that its decisions will depend on additional data that is published. With this panorama, any movement in the price of money seems ruled out at least until the last meeting of the summer, that of September 17 and 18.
Follow all the information Economy and Business in Facebook and xor in our weekly newsletter
