What Is the Importance of May 2023 U.S. Inflation Data?
May 2023 U.S. Consumer Price Index, in other words, the inflation data has just been announced. While the downward trend in inflation continued, the inflation data, which was 4.9% in April, came at 4.0% in May, below expectations. This new data shows that inflation in the U.S. has fallen to the lowest level in two years. Apart from the negative effects of the Fed’s interest rate hikes on the economy and risky assets, it seems to have achieved remarkable success in its fight against inflation. As in the graph below, inflation has declined every month since the second half of 2022, when the effect of the Fed’s interest rate hikes began to be felt sharply. While the U.S. had the highest inflation in 40 years at 9.1% in June 2022, today's data shows that it has fallen to 4.0% inflation in about 11 months.
How Will It Affect the Fed’s Interest Rate Decision?
Inflation data has always had a significant impact on the Fed’s interest rate decisions. High inflation means overheating of the economy and a rapid rise in the overall level of prices of goods and services. In such cases, the Fed usually limits the money supply by raising interest rates and tries to cool the economy. The FED stated that it had closed the cash taps opened with the pandemic some time ago and would raise interest rates to reduce the money supply in the market and took steps in this direction.
After each meeting, Fed Chairman Powell said that they would move forward considering the data and that they wanted to make sure that the signals of improvement in inflation were permanent. According to FedWatchTool, the expectation that the Fed’s interest rate decision will stay the same after the inflation data is released is around 80%. At the moment, the Fed seems to be quite successful on the path it has planned and wanted. Therefore, if the downward trend in inflation continues, the likelihood of a new interest rate hike seems pretty low.
