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  • Writer's pictureRealFacts Editorial Team

Positive Inflation Data Fuels Investor Optimism for Fed Rate Cuts

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The overall consumer price index remained unchanged for the month, contrary to the forecasted 0.1% increase. The 12-month CPI inflation rate unexpectedly decreased to 3.3% from 3.4%. The core CPI, which excludes the volatile food and energy prices, increased by 0.2% compared to April levels, lower than the anticipated 0.3%. On an unrounded basis, the core CPI inflation saw an even cooler increase of 0.16% for the month, marking the mildest core inflation reading since August 2021. The annual core CPI inflation rate also unexpectedly dropped to 3.4% from 3.6% in April, below the predicted 3.5%. 

These positive figures boosted investor confidence that the Federal Open Market Committee (FOMC) will implement a rate cut at their September meeting. Jed Graham, Investors Business Daily author, reported, “After the CPI inflation data, markets are pricing in 71% odds of a rate cut by the Sept. 18 Fed meeting, up from 54% ahead of the CPI. Markets now see 72% odds of two quarter-point rate cuts before the end of this year, up from 51%.” With this boost in investor sentiment, the markets rose over one percent, pushing the S&P 500 to intraday record highs. 

One large question for investors to consider is whether this slowing inflation will prompt the Fed to cut rates sooner and by larger amounts. To answer this, it's important to consider a couple of crucial factors. First, Fed policy isn't typically swayed by a single month of data. Policymakers have stated that it will take several months to confirm that inflation is on a path back to the 2% target, though the May CPI data is a promising start. Second, it's essential to remember that the CPI differs significantly from the Fed's primary inflation measure, the core PCE price index. 

Graham stated,  “We'll have a much better idea after Thursday's producer price index release whether core PCE inflation will be similarly tame in May. Some PPI data feed directly into PCE inflation, including health care services, which is the biggest component of the core PCE price index.” As investors monitor for further signs of slowing inflation, they can anticipate positive market reactions if the Fed begins cutting rates at the September meeting.


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