Inflation loosens its grip on U.S. economy, but economists warn fight isn’t over

The U.S. Consumer Price Index (CPI) came in slightly cooler than expected in May, raising cautious optimism that the Fed had turned a corner in its fight against inflation.

According to the Bureau of Labor Statistics, the CPI was flat in May and increased by 3.3% from a year earlier. Both figures were 0.1 percentage point lower than economists’ forecasts.

The all-important core CPI, which excludes volatile goods such as food and energy, increased by 0.2% from April and 3.4% year-over-year—0.1 percentage point lower than expected.

The May report provided further evidence that inflation is moderating after exceeding forecasts in the first three months of the year. As Creditnews reported, inflation growth nearly doubled in the first quarter even as economic growth stalled.

Despite the progress, the U.S. CPI has remained above 3% for 38 consecutive months—the longest stretch since the late 1980s to early 1990s. It remains well above the Fed’s 2% target, which limits policymakers' ability to cut rates.

High inflation forcing the Fed’s hand

Economists are urging caution about declaring the end of inflation or expecting the Fed to do a victory lap after the latest report.

Last month, Fed Chair Jerome Powell admitted that progress on inflation had been slower than he’d like and that “the data has not given [...] greater confidence” about moving ahead with rate cuts.

Due to “inadequate progress in the inflation fight and continued growth and labor momentum,” Vanguard chief economist Roger Aliaga-Diaz expects the Fed to keep rates on hold for at least six months.

Meanwhile, Deutsche Bank told clients that it would be unwise to expect a rate cut anytime soon. “Fed officials have clearly signaled that they are in a wait-and-see mode with respect to the timing and magnitude of rate cuts,” the bank said.

“You’re going to need three more months of very friendly inflation data to cut” in the fall, said SMBC Nikko Securities chief economist Joseph LaVorgna.

In LaVorgna’s view, the Fed risks pulling further away from its 2% inflation goal if it cuts rates too soon.

Some economists think the Fed’s 2% inflation target is one of its biggest policy blunders. John Hopkins economist Laurence Ball wants the Fed to aim for 4% inflation, which he thinks is a more realistic target and would give policymakers more leeway in setting rates.