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US inflation fell to 3.3 per cent in May, raising expectations of early interest rate cuts and delivering a boost to the stock market and President Joe Biden.
The data, issued on Wednesday hours before Federal Reserve officials are due to outline their plans for rate cuts this year, was marginally below economists’ expectations.
US stocks opened at record highs and Treasury yields dropped after the release as investors bet on more interest rate cuts this year.
The S&P 500 rose as much as 1.1 per cent to a record intraday high of 5,436.89 in early trading, while the Nasdaq Composite was up 1.6 per cent.
Traders in the futures market raised bets on a September rate cut, before this year’s presidential election, putting the odds at 84 per cent. That compares with 60 per cent before the inflation data release.
Investors are now fully pricing in two quarter-point interest rate cuts this year. Previously it had been between one and two.
The 3.3 per cent rise in the headline consumer price index compared with a Reuters survey that expected the rate to remain at 3.4 per cent.
Core CPI, which strips out changes for food and energy prices, hit 3.4 per cent, below expectations of a slight fall to 3.5 per cent.
The Bureau of Labor Statistics data also showed month-on-month headline inflation was zero, while the core figure edged up just 0.2 per cent.
Biden hailed the figures as “welcome progress on lowering inflation”, adding that it was now “nearly two-thirds from its peak”, with core inflation at its lowest since April 2021.
The president is seeking to convince voters of his economic record in the run-up to the November election.
But he still lagged his Republican rival Donald Trump in terms of handling the economy in last week’s FT-Michigan Ross poll of US voters, although he has narrowed the gap in recent months.
The two-year Treasury yield, which moves with interest rate expectations and inversely to price, fell to its lowest since early April, down 0.16 percentage points to 4.68 per cent.
The Fed is expected to leave interest rates on hold at their 23-year high of 5.25 per cent to 5.5 per cent, in an announcement due later on Wednesday.
The central bank will also publish its projection, or “dot plot”, for how many times it intends to cut borrowing costs this year.
Blerina Uruci, chief US economist at T Rowe Price, said her “base case” was that the Fed would signal two quarter-point rate cuts this year.
In March, before further signs of persistent price pressures in the US economy, the central bank said it had expected three cuts in 2024.
“My base case is for them to go down from three to two,” Uruci said, arguing that the fall in the core inflation rate would be “pretty encouraging” to the Fed. “The risks that they go down to one are, after this CPI report, lower.”
While the Fed’s preferred inflation gauge is the personal consumption expenditures figure, CPI data still has an impact on the central bank’s approach to cutting rates.
