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Egg prices are dropping and gas prices are down sharply from a year ago, but that likely won’t be enough to get the Federal Reserve to stop raising interest rates.
The consumer price index (CPI), due Tuesday morning, is expected to show overall 12-month inflation continued to slow in May but remain way too high for the Fed’s comfort. On average, economists expect CPI of 4.2%, more than twice the Fed’s goal for 2% inflation.
“Such figures, more than 2X the 2% inflation goal would suggest a data-dependent Fed would have to continue its rate hikes,” wrote economists at Action Economics.
When is the CPI report due?
May 2023 CPI data are scheduled to be released at 8:30 A.M. Eastern Time on Tuesday, June 13.
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Is CPI the only measure of inflation the Federal Reserve considers?
No. Actually, the Fed’s preferred inflation gauge is the Personal Consumption Expenditures price index (PCE) from the Bureau of Economic Analysis. PCE also is broken into headline and core but measures a different basket of goods and services and includes a wider group of people surveyed.
PCE measures price changes for all direct and indirect consumer consumption, not just literally what urban households are paying out of pocket like in CPI. For example, CPI would only capture what urban households pay out of pocket for medical expenses, but PCE includes costs covered by employer-provided insurance, Medicare, and Medicaid.
Also, PCE accounts for substitutions. “Thus, if the price of bread goes up, people buy less bread, and the PCE uses a new basket of goods that accounts for people buying less bread,” the Cleveland Fed said. “The CPI uses the same basket as before.”
CPI tends to run hotter than PCE.
What categories will see strong price gains?
Higher food away from home (think restaurants) prices are expected to erase most of the slowdown in grocery prices, economists said.
Bank of America economists said restaurant prices are being buoyed by increased labor costs and people’s penchant to eat out. As a result, the overall food category encompassing both groceries and restaurant foods will only dip by 0.1% month over month in May, they said.
Meanwhile, core CPI will be lifted again by higher used car prices, economists said. Goldman Sachs forecasts a 3% jump in used car prices in May from April but expects price increases to ease in coming months.
Rents are expected to increase 0.5% month over month, but that’s slower than the 0.7% increases seen as recently as February, noted Moody’s Analytics economist Dante DeAntonio.
With summer approaching, Goldman Sachs also expects hotel prices to jump 2% in May and recreation to rise 0.4%, reflecting high wage growth over the last year and anticipation of solid consumer demand.
What areas will see weak price growth?
Headline CPI will be held down by lower energy prices, economists said. Bank of America economists forecast a hefty 3% monthly decline in energy prices as gas prices declined in May. AAA data show average regular gasoline prices declined 2.1% month over month.
Consumers should also see a third consecutive decline in grocery prices “as costs associated with groceries-commodity prices, transportation, and storage-have continued to ease,” Bank of America economists said.
Adobe Analytics said on Tuesday its monthly online inflation survey grocery price increases slowed for the eighth consecutive month. In May, online grocery prices rose 0.3% monthly, or 8.2% annually. “Consumers are increasingly buying more of their groceries online, and this category has generally moved in lock step with the Consumer Price Index,” it said.
How Dow futures are trading before the CPI report?
Futures tied to the broad stock market gauge, the S&P 500 index, were up 0.09% at 4,346.50 early Tuesday morning, while futures connected to the blue-chip Dow were down 0.02% at 34,077 and the tech-laden Nasdaq-100 traded up 0.3% at 14,843.25.
What is CPI and what is core CPI?
CPI, short for the consumer price index, is an inflation gauge prepared by the Bureau of Labor Statistics each month. It measures the average change over time of what urban consumers pay for a market basket of consumer goods and services.
There are two main parts to CPI:
- Headline, or overall, CPI
- Core CPI, which excludes the volatile energy and food sectors
“Over the short term, the core measure may give a more accurate reading of where inflation is headed, but people do buy food, fill up their gas tanks, and heat their homes, so headline inflation more accurately represents people’s actual expenses,” according to the Cleveland Federal Reserve.
What do economists predict for CPI?
According to research firm FactSet, economists on average expect:
- May CPI is forecast up 0.2% in May after rising 0.4% in April.
- Core CPI up 0.4% for the month versus 0.4% in April.
- Year-over-year CPI is seen rising 4.2% in May after gaining 4.9% in April.
- Year-over-year core CPI is expected to rise 5.2% versus 5.5% in April.
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