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U.S. inflation fell to 3.3 percent in May, raising expectations of early rate cuts and boosting the stock market and President Joe Biden.
The figures, released Wednesday before Federal Reserve officials were set to outline their plans for rate cuts this year, were marginally below economists’ expectations.
The S&P 500 rose as much as 1.3 percent to a record intraday high of 5,446.28 after the report, as investors bet on more rate cuts this year.
Ronald Temple, chief market strategist at Lazard, said the figures were “exactly what the Fed needed to boost confidence that inflation is slowing and that rate cuts are justified in the coming months.”
Futures traders had increased their bets on a September rate cut ahead of this year’s presidential election, putting the odds at 81 percent. That compares with 60 percent before the inflation data was released.
“An interest rate cut in September is back in full swing,” Temple said.
Investors are also now fully pricing in the Fed’s two quarter-point rate cuts this year – up from between one and two.
Biden hailed Wednesday’s data as “welcome progress in lowering inflation,” adding that it was now “nearly two-thirds of its peak,” with core inflation at its lowest level since April 2021.
The consumer price index rose 3.3 percent compared with a Reuters survey that expected the figure to remain at 3.4 percent.
The core CPI, which excludes changes in food and energy prices, came in at 3.4 percent, below expectations of 3.5 percent.
The Bureau of Labor Statistics data also showed that headline monthly inflation was zero, while the core rate rose just 0.2 percent.
Biden is trying to convince voters of his economic performance in the run-up to the November elections.
But in last week’s FT-Michigan Ross survey of US voters, the US president still trailed his Republican rival Donald Trump in handling the economy, although he has narrowed the gap in recent months.
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The Fed is expected to leave interest rates unchanged at a 23-year high of 5.25 to 5.5 percent, to be announced later on Wednesday.
The central bank will also release its projection, or “dot plot,” for how often it plans to cut borrowing costs this year.
Blerina Uruci, chief US economist at T Rowe Price, said her “base case” was that the Fed would cut rates by two quarter points this year.
In March, before there were further signs of continued price pressure in the US economy, the central bank said it expected three cuts in 2024.
“My base case is that they go from three to two,” Uruci said, arguing that the decline in core inflation would be “quite encouraging” for the Fed. “The risks of them going back to one, after this CPI report, are lower.”
Although the Fed’s preferred inflation gauge is personal consumption expenditures, CPI data still has an impact on the central bank’s approach to lowering rates.
The yield on two-year government bonds, which moves with interest rate expectations and inversely with the price, fell in the wake of the inflation figures to the lowest level since early April, namely by 0.15 percentage point to 4.68 percent.
James Knightley, chief international economist at ING, said Wednesday’s figures continued to show “areas of continued strength in pricing power”, particularly in housing costs and medical care prices. But the report was overall “good news” in the Fed’s battle to curb inflation.
“This should become the trend after a series of measurements that were much too warm at the beginning of the year. We think so, and with unemployment rising, we expect the Fed to cut rates in September,” Knightley said.
Additional reporting by George Steer