Inflation Could Delay Rate Hike

6/27/2016


Consumer Price Index data for May came out June 16, the day after the Federal Open Market Committee's monetary-policy meeting, and made the central bankers look prescient.

While the FOMC didn't lower its inflation expectations, it did project a more gradual path to higher short-term interest rates, reflecting a slight slowdown in expected economic growth.

Inflation rose 0.2% in May, less than economists expected. On a year-over-year basis, headline inflation was 1.1%, while core inflation (excluding energy and food) rose slightly to 2.2%. The FOMC's preferred inflation indicator, the Personal Consumption Expenditures Price Index, was up 1.1% in April from a year ago, with May numbers slated for release late this month. The two inflation metrics have moved in step so far this year.

One of the reasons cited for the Fed's reluctance to raise the fed funds rate is inflation below the level the FOMC targets for a healthy economy. In response to May inflation data, investors pushed the expected rate hike further back.

Futures prices imply a 43% chance that short-term interest rates won't rise further this year, versus a 28% chance a month ago.


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