Persistent Inflation, Federal Reserve Meeting to Headline Economic Week

A Target customer looks at a display of board games while shopping at one of the retailer's stores in San Francisco on Dec. 15, 2022. (Justin Sullivan/Getty Images)

Inflation data and the Federal Reserve’s policy meeting headline this week’s economic events, although investors also will be watching other important data such as retail sales numbers, regional central bank manufacturing index readings, and consumer sentiment.

The May consumer price index (CPI) report will be released on June 13. The consensus estimate is an annual print of 4.1 percent, according to the Federal Reserve Bank of Cleveland’s Inflation Nowcasting.

If accurate, that would be down from the April headline number of 4.9 percent. The monthly CPI is forecast to edge up 0.2 percent, a slowdown from 0.4 percent in April.

Core CPI, which strips the volatile energy and food components, is expected to slip to 5.3 percent, from 5.5 percent in the previous month. The month-over-month core inflation rate is anticipated to remain the same at 0.4 percent.

Federal Reserve Board Chairman Jerome Powell delivers remarks at a news conference following a Federal Open Market Committee meeting in Washington on May 3, 2023. (Anna Moneymaker/Getty Images)

The producer price index (PPI) will be published on June 14. Producer prices are expected to ease to 1.5 percent year-over-year and tick 0.1 percent lower month-over-month. The consensus estimate for the core PPI is 2.9 percent year-over-year and 0.2 percent month-over-month.

One of the reasons behind a slowing headline inflation figure will be lower crude oil and gasoline prices. West Texas Intermediate (WTI) crude oil fell nearly 3 percent, while gasoline prices tumbled close to 1 percent in May.

But while market observers are penciling in a slower overall inflation rate, experts say that price pressures under the hood, particularly services, remain sticky and stubborn.

In April, services—which account for about 57 percent of the CPI and include everything from medical care to tuition to transportation—eased below 7 percent for the first time since August 2022.

As a result, it may require more work from the Fed to grapple with service inflation.

“Over the next few months, headline CPI numbers should be slowing down,” Donald Rissmiller, a chief economist at Strategas Research Partners, said in a Morningstar note. “But as we dig through the details, we’re going to have to see what exactly is happening to some of the other pieces that may or may not be moving the same way.”

Speaking at the two-day Caixin Asia New Vision Forum in Singapore, former Treasury Secretary Lawrence Summers asserted that the United States is “an underlying 4.5 to 5 percent inflation country” today.

The one-year-ahead consumer inflation expectations slowed to 4.1 percent in May, down from 4.4 percent in April, according to the New York Fed’s Survey of Consumer Expectations (SCE).

The three- and five-year-ahead inflation expectations rose 0.1 percent to 3 percent and 2.7 percent, respectively.

Open Market Committee Meets

The Federal Reserve will host its two-day policy meeting on June 13 and 14. Economists are debating if the Federal Open Market Committee (FOMC) will skip a rate increase or follow through on a quarter-point boost to the benchmark fed funds rate.

While market pricing has been volatile over recent weeks, the futures market is penciling in a rate pause, according to the CME FedWatch Tool.

ING economists say the most likely outcome will be no change to the policy rate, although a shock CPI report might make it a close call.

“Nonetheless, the Fed wants to see 0.2 percent month-on-month or below CPI readings to be confident inflation will return to 2 percent. We aren’t there yet so if they do hold rates steady, as we predict, it is likely to be a hawkish hold with the door left open to further rate hikes if inflation doesn’t slow—July is clearly a risk,” wrote ING economists, including chief international economist James Knightley.

“We certainly acknowledge the risk that they hike rates 25 basis points, especially if Tuesday’s [June 13] inflation data surprises to the upside, but doubt they will intensify the language on rate hikes so the ‘hawkish hike’ scenario in the table above looks unlikely.”

The Fed will also publish its updated forecasts—the Survey of Economic Projections (SEP)—and release the dot plot chart for individual forecasts.

In March, the SEP highlighted that the median policy rate would be left in the 5 and 5.25 percent range through the end of 2023.

In recent weeks, several Fed officials have suggested that any rate pause might not indicate that the central bank is finished with its tightening cycle.

“A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,” Fed Governor Philip Jefferson said in a speech last month.

“Skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming.”

Fed Wants Pause

Deutsche Bank economists say it would take substantial “upside surprises” and a “sizeable outperformance” in the CPI or PPI for the Fed to shock financial markets.

“More likely, moderate upside surprises in this week’s inflation data would be met with a stronger tightening signal from the dot plot and Chair Powell’s press conference,” they wrote in a note.

“That being said if the market were to fully price another 25 basis points rate hike post-Tuesday’s CPI report, it would be difficult for the committee to surprise in a dovish direction by not hiking.”

Jeff Klingelhofer, managing director of Thornburg, warns that the biggest mistake for the financial markets “is not listening to the Fed.”

“Powell is telling us that he wants to pause, and I think that’s the highest likelihood outcome of the meeting,” he wrote in a note.

“I believe that the Fed is telling us that they’re going to be very data dependent. If they don’t see inflation, particularly services labor inflation, begin to come down in a meaningful way, I think that they’re likely to raise the level at the next meeting in July after this upcoming meeting.”

Other major central banks, including the European Central Bank (ECB), will meet this week.

The ECB is widely expected to pull the trigger on a quarter-point rate increase, lifting the benchmark interest rate to 4 percent.

Monetary policymakers will make their decision with a modest economic downturn in the background. Last week, revised data confirmed that the eurozone slipped into a mild recession after back-to-back quarters of gross domestic product (GDP) contraction.

“Markets are pricing one more in July but not fully, with the drop in inflation [including core] last month easing the pressure on the central bank to continue. I expect it will stress that there’s more to do and rate cuts are not even under consideration this year but they could indicate that a pause is now on the table,” Craig Erlam, a senior market analyst at OANDA, said in a note.

But some argue that the recent decisions by other central banks could fuel hawkish policy maneuvers.

After a two-meeting pause, the Bank of Canada (BoC) surprised investors by raising rates by 25 basis points. The Reserve Bank of Australia also raised eyebrows in the financial markets following a quarter-point boost.

Health of Economy

The U.S. Census Bureau will release the May retail sales numbers. It’s expected that retail trade will have fallen 0.1 percent last month, down from the 0.4 percent gain in April.

Core retail sales, which eliminates automobile sales, are forecast to inch 0.1 percent higher.

The preliminary University of Michigan Consumer Sentiment Index estimate for June will be posted on June 16. It’s expected to jump to 60, from 59.2. The Current Conditions Index and Consumer Expectations Index are also expected to rise to 65.5 and 56.5, respectively.

A plethora of manufacturing data also will be released, including manufacturing and industrial production for May. Moreover, the Philadelphia Fed and New York Fed Manufacturing Index prints are anticipated to remain in contraction territory.

Ultimately, these numbers could confirm if a downturn is on the horizon.

Goldman Sachs economists lowered their recession probabilities to 25 percent, from a 35 percent chance following the failures of Silicon Valley Bank and Signature Bank in March. That’s far below the Bloomberg Consensus of about 60 percent.

The widely watched Atlanta Fed GDPNow model estimate anticipates second-quarter GDP growth coming in at 2.2 percent, down from the model’s peak of 2.8 percent in late May.