Stay informed with free updates
Simply log in to inflation in the US myFT Digest – delivered straight to your inbox.
U.S. inflation fell to 3.3 percent in May, raising expectations for an early interest rate cut and giving a boost to the stock market and President Joe Biden.
The data, released Wednesday hours before Federal Reserve officials are expected to outline their plans for a rate cut this year, came in slightly 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 interest rate cuts this year.
Ronald Temple, chief market strategist at Lazard, said the numbers were “exactly what the Fed needed to boost its confidence that inflation is easing and that rate cuts are warranted in the coming months.”
Futures traders raised bets on a September rate cut ahead of this year’s presidential election, pushing the odds to 81 percent. That’s compared to 60 percent before the inflation data was released.
“The September rate cut is back in play,” Temple said.
Investors are also now fully appreciating the Fed’s two quarterly rate cuts this year – from one to two.
Biden hailed Wednesday’s data as “welcome progress in reducing inflation,” adding that it was now “nearly two-thirds from its peak,” with core inflation at its lowest level since April 2021.
The overall consumer price index rose 3.3 percent, compared with a Reuters poll that had expected the rate to remain at 3.4 percent.
Core CPI, which strips out changes in food and energy prices, came in at 3.4 percent, below expectations of 3.5 percent.
Bureau of Labor Statistics data also showed that month-on-month headline inflation was zero, while the core figure edged up just 0.2 percent.
Biden is trying to convince voters of his economic record in the run-up to the November election.
But the US president still trailed his Republican rival Donald Trump on his handling of the economy in last week’s FT-Michigan Ross poll of US voters, although he has narrowed the gap in recent months.
You see a screenshot of the interactive graphic. This is most likely because you are offline or JavaScript is disabled in your browser.
The Fed is expected to leave interest rates at their 23-year high of 5.25 percent to 5.5 percent in an announcement later Wednesday.
The central bank will also publish its projection, or “dot chart”, of how many times it intends to cut borrowing costs this year.
Blerina Uruci, chief U.S. economist at T Rowe Price, said her “base case” was that the Fed would signal two quarter-percent rate cuts this year.
In March, ahead of further signs of lingering price pressures in the US economy, the central bank said it expected three cuts in 2024.
“My base case is for them to go down from three to two,” Uruci said, adding that a drop in the core inflation rate would be “quite encouraging” for the Fed. “Risks falling to one are lower after this CPI report.”
While the Fed’s preferred measure of inflation is the personal consumption expenditure figure, the CPI data still influences the central bank’s rate-cutting approach.
The two-year Treasury yield, which moves in line with interest rate expectations and inversely to price, fell to its lowest level since early April on inflation data, down 0.15 percentage point to 4.68 percent.
James Knightley, ING’s chief international economist, said Wednesday’s data still showed “areas of continued strength in pricing power”, particularly in housing costs and medical care prices. But overall, the report was “good news” in the Fed’s fight to tame inflation.
“This has to become a trend after a series of too hot data earlier in the year. We think that will be the case, and with unemployment rising, we expect the Fed to cut rates in September,” Knightley said.
More news from George Steer