Fed likely to hold rates steady as CPI declines to a 2-year low

The much-awaited CPI data was released today and were in sync with industry expectations.

CPI declined to 4% YoY, reaching this level for the first time since March 2021.

The headline figure has eased every month since peaking in June 2022 at 9.1%

On a monthly basis, inflation was steady at 0.1%, also in line with expectations, as reported by the Wall Street Journal.

Food prices were up 6.7% on an unadjusted 12-month basis, while energy was 8.3% higher and shelter increased by 8%.

For the year, transportation was the largest gainer at 10.2%, while fuel oil was down 37% followed by gasoline at 19.7%.

Together, energy commodities fell -20.4% YoY.

In terms of CPI MoM, shelter and the index for cars and trucks were the most significant contributors.

Core CPI

Core CPI (non-food, non-energy) moderated from 5.5% during the previous month, but remained stubborn only easing to 5.3%.

Having peaked at 6.6% last year, the Fed is making progress on core CPI.

However, the FOMC will continue with its hawkish rhetoric as consumers continue to feel the pinch.

Month-on-month, core CPI rose by 0.4%, also in line with industry expectations as reported by WSJ.

The Fed’s upcoming decision

According to CME FedWatch data, the chances of keeping rates steady have risen from 81.5% just before the CPI release to 98.8%.

This would mark the first meeting in 11 where the FOMC chooses to not tighten monetary policy.

The Fed will also be closely watching the Producer Price Index which is due tomorrow and is forecast to be at 2.1% YoY for the headline and 3.0% YoY for core (as per TradingEconomics.com).

Given that the CPI numbers were exactly in line with forecasts, the PPI is unlikely to see any significant deviation.

However, since core CPI remains sticky, the Fed will continue to maintain a hawkish stance and may look to tighten once more in the following meeting.

Dollar response

Post-publication, the dollar came under pressure and declined by half a per cent to 103 levels as the markets widely anticipate a pause in the hiking cycle.

Interested readers can also view my article on the Fed’s possible actions for the rest of the year.