May CPI Report Comes in Soft: What the Experts Are Saying About Inflation

Inflation cooled markedly last month, the May Consumer Price Index (CPI) showed Wednesday, keeping the Federal Reserve on track to cut interest rates at least once before the end of 2024, experts say.

The data come too late to affect the Federal Open Market Committee's (FOMC) June meeting, experts note, while stressing that a data-dependent central bank will likely need to see more dovish developments before it enacts its first quarter-point reduction to the short-term federal funds rate.

Nevertheless, the inflation data was good news for market participants and consumers alike. Headline CPI was unchanged last month after rising 0.3% in April, according to the U.S. Bureau of Labor Statistics. That was the slowest rate of headline inflation seen in almost two years. On an annual basis, CPI increased 3.3% in May, down from 3.4% the prior month.

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Meanwhile, core CPI, which excludes food and energy costs, increased 0.2% last month after rising 0.3% in April. 

"May's tiny increase in the core CPI – the smallest since August 2021 – should be good enough for the median FOMC participant to envisage two quarter-point reductions in rates in 2024, taking out only one of the three easings projected back in March," wrote Ian Shepherdson, chairman and chief economist at Pantheon Macroeconomics.

Fed Chair Jerome Powell and the Federal Open Market Committee (FOMC) are looking for sustained evidence that inflation is down to its 2% target before they move to cut the fed funds rate from a 23-year high. The latest CPI report adds a dovish data point to the Fed's deliberations on interest rates, experts say.

As of June 12, futures traders assigned a 61% probability to the first quarter-point cut coming in September, up from 47% a day ago, according to CME Group's FedWatch Tool. 

With the May CPI report now a matter of record, we turned to economists, strategists and other experts for their thoughts on what the data means for markets, macroeconomics and monetary policy going forward. Please see a selection of their commentary, sometimes edited for brevity or clarity, below.

Expert takes on the CPI report

"This report builds the case that inflation has resumed its downward path after an unanticipated surge in the first quarter. If sustained, it will keep Fed rate-cut expectations that we have penciled in for September and December alive and well. Restrictive monetary policy has more work to do, and the Fed will remain patient and watchful. However, today's far softer CPI report will go a long way in making the case that it can soon safely ease off the monetary brake pedal without risking another inflation episode." – Scott Anderson, chief U.S. economist at BMO Capital Markets 

"May CPI was softer than expected across headline and core readings, indicating the disinflation process is playing out. This keeps the Fed on track for cuts in 2024, with the first cut likely coming in September, especially with the unemployment rate at 4% and risk of going higher." – Sonu Varghese, global macro strategist at Carson Group

"Although the inflation trend continues to decline, the rate of change is becoming less and less. This slower rate of change coupled with persistently higher components of CPI such as shelter and insurance costs, is making the Fed rate cut calls difficult to navigate. The U.S. is under pressure to enact 2024 rate cuts considering the ECB's recent rate cut. There is continued concern that Powell is holding a restrictive stance which could fuel potential recessionary fires. The timeline of future rate cuts continues to be evasive. The slower rate of change coupled with conflicting inflationary signs, such as volatile energy costs, continue to push rate cuts further and further into the future. We believe June rate cuts are off the table and one rate cut prior to December 31, 2024 is a possibility, but not definite." – Robert Conzo, CEO and managing director at The Wealth Alliance

"Today's report was largely what the Fed and the markets were hoping for. Inflation was slightly below expectations on both headline and core, both month over month and year over year. Longer-term rates should move lower on this report. Despite today's cooler inflation data, we expect the Fed to hold steady at today's meeting. An interest rate cut later this year looks increasingly likely, however. One implication of moderating inflation and declining interest rates could be a tailwind for small cap stocks. These companies often have higher debt levels and have struggled in a rising rate environment. Lower rates could help broaden a narrow equity market." – David Royal, chief financial and investment officer at Thrivent

"Top to bottom, this was an encouraging inflation report for the markets. And while today's CPI report certainly doesn't guarantee anything, it was enough to quash re-inflation narratives while keeping rate cuts firmly in the discussion this fall." – Ivan Gruhl, co-chief investment officer at Avantax

"May's inflation numbers suggest that prices are trending in the right direction but at an insufficient pace to support relief from interest rates before September. Alongside a robust jobs report indicating few significant weaknesses in the labor market, the Fed has breathing room to keep their high standards for progress on inflation, with a September timeline providing ample opportunity for further data to confirm that prices are moving sustainably toward optimal levels. The recent contraction in headline CPI owing to lower energy prices is an important step in the right direction, as the lower production costs will help drive prices down on both goods and services for consumers." – Noah Yosif, chief economist at the American Staffing Association

"The Fed has quite a bit to consider given today's CPI report coming in flat from the month prior. Markets cheered that it was better than expected and below expectations. The Fed will consider this carefully as they are aware that if they wait too long with rates this high before beginning to cut, it could throw certain sectors that are already experiencing slowdowns into a recessionary environment." – Kathleen Grace, managing member and CEO at Fiduciary Family Office

"Households pulling back on discretionary spending have been noted among a number of earnings reports and we expect that this dynamic will take some of the air out of core goods prices. Shelter inflation slows more gradually, but is a relatively high weight within the CPI measurement that the Fed watches closely. Since the increase in rates is now fully represented in housing data, the lagged impact of shelter disinflation should work its way through CPI numbers and carry through the next few months, further conviction that rate cuts will begin soon." – Sarah Henry, managing director, portfolio manager at Logan Capital Management

"We squarely believe the CPI number was not weak enough to change our view on July's meeting. While September may be on the table, today would have had to be the first of a handful of inflation data prints that went right, which it did. It does remain challenging, however, for inflation to cool with the backdrop of the summer's heat. Let's see what the Fed forecasts this afternoon. This is good news, but we will need more of it." – Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management

"Finally, a surprise to the downside in CPI. Markets should like this news today as movement toward the Fed's 2% inflation target further justifies a nearer timeline for rate cutting. At the same time today, however, market participants will be bracing this afternoon for Powell's release on June's interest rate decision and, more importantly, a read on the Fed's appetite for rate cuts at this point in time." – Ben Vaske, senior investment strategist at Orion Portfolio Solutions

"Inflation is slowing even as the economy accelerates. Lingering pandemic effects like auto insurance are fading and normal cyclical forces are hitting items like energy and transportation. Things are playing out as the Fed hoped, so Jerome Powell will probably be feeling good this afternoon. September could be back in play for a rate cut. The bears have nowhere to run to and nowhere to hide." – David Russell, global head of market strategy at TradeStation

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