Paul Krugman has said: Inflation has basically been defeated.
U.S. consumer prices remained unexpectedly unchanged in May, as lower gasoline and other goods prices balanced out the rising costs of rental housing. However, inflation remains too high for the Federal Reserve to consider cutting interest rates before September.
The Labor Department's report on Wednesday revealed that underlying inflation pressures eased significantly last month, with the cost of motor vehicle insurance declining on a monthly basis for the first time since the fourth quarter of 2021. This data led financial markets to increase the likelihood that the U.S. central bank would cut rates in September and December.
Nevertheless, policymakers on Wednesday projected only a single quarter-percentage-point reduction in borrowing costs, with the easing cycle possibly not starting before December. They left the Fed's benchmark overnight interest rate unchanged at the current range of 5.25%-5.50%, where it has been since July, and slightly raised the inflation forecast for 2024.
Most economists continued to expect two rate cuts, starting in September, arguing that inflation had turned a corner after surging in the first quarter.
"If we continue to receive tame monthly inflation readings in the coming months, the Fed could start to cut rates in September and follow up again in December with another reduction," said Kathy Bostjancic, chief economist at Nationwide.
The unchanged reading in the consumer price index (CPI) last month followed a 0.3% increase in April, according to the Labor Department's Bureau of Labor Statistics. It was the softest reading since July 2022. The CPI has been trending lower since posting solid readings in February and March.
Economists polled by Reuters had forecast the CPI would edge up 0.1% in May. Price pressures could continue moderating as major retailers, including Target, slash prices on goods ranging from food to diapers in an effort to attract inflation-weary consumers.
