US Inflation Data Does not Offer Any Relief to Fed

New economic data released in the United States for the month of May had little immediate relief to offer from the red-hot rise in inflation. This is expected to drive the US Federal Reserve to make yet another aggressive hike in interest rates in July. However, the data did add a sense that inflation may have finally hit its peak, which means the worst could be over.

The inflation data

The consumer price index used for measuring inflation showed that the figure stayed steady at 6.3% in the month of May, just as it had been in April. But, it was still triple the 2% target of the US central bank when it comes to market inflation. This is way far from the evidence that the Fed will require before it decides to halt its aggressive monetary policy tightening for curbing inflation.

After the latest inflation data was released, traders of futures linked to the targeted interest rate of the central bank priced in bets that there would be another interest rate increase of 75 basis points in the month of July.

However, the same traders believe that there is an opening for the US Federal Reserve to slow down its pace of rate hikes from November onwards. They also believe that it is possible that the rate hikes may come to a stop altogether at the beginning of next year, as evidence increases that inflation could have hit its peak and the global economy is experiencing a slowdown.

Separate measures

Even though there was no decline in the headline inflation number, there was a fall in a separate measure for the third month straight. This excludes the cost of energy and food from the inflation calculation and it has declined to a low of 4.7%.

The ‘core’ inflation figure has always been considered controversial because it does not take into account some of the prices that have a big impact on daily life. There is also a lot of debate on the focus of the Fed on PCE inflation, instead of the separate consumer price index (CPI), which is usually higher. This is because it does not give enough weight to the cost of things like housing which has also seen a quick rise.

However, if the core PCE continues to decline, it would still signal to policymakers that prices are heading down.

Decline has begun

Market economists said that core inflation has begun to come down because of a combination of factors, such as a stronger US dollar, lower margin inflation, and a slower rise in wages. But, it has to come down even more for the Fed to be convinced that rate hikes can be slowed down.

Nonetheless, the recent data shows that consumer spending at the start of the year was less than estimated. Similarly, the data released on Thursday showed that there had been a decline in consumer spending as well as disposable income for the month of May after the figures were adjusted for inflation.

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