US inflation falls to 3.3% in May

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US inflation fell to 3.3 per cent in May, leading investors to bring forward their expectations of interest rate cuts and delivering a boost to President Joe Biden.

The data, issued hours before Federal Reserve officials are due to outline their plans for rate cuts this year, was marginally below economists’ expectations.

Treasury yields fell and stock futures rose following the release, as investors bet on more interest rate cuts this year.

After Wednesday’s figures, traders in the futures market gave an 84 per cent likelihood to a cut before this year’s presidential election, by the time of the Fed’s September meeting. That compares with a 60 per cent chance beforehand.

Biden has touted a strong labour market and falling inflation as he seeks to convince voters of his economic record in the run-up to the November election.

Traders have now fully priced in two cuts this year, according to LSEG data. 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.

Wednesday’s 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.

The Fed is set to leave interest rates on hold at their 23-year high of 5.25 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 cut 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.

Last week’s FT-Michigan Ross poll of American voters showed that former president Donald Trump’s lead over Biden in trustworthiness to handle the economy had fallen from 11 points to four between February and June.