Due to the drop in oil prices, the CPI data released on Wednesday may slow down. Wall Street traders and Federal Reserve officials will pay special attention to the core CPI data that does not include highly volatile food and energy prices.

According to a survey conducted by data provider FactSet, the so-called May core CPI inflation rate is expected to increase by 0.3% on a month-on-month basis, and the year-on-year growth rate will drop from 3.6% to 3.5%.

Even if overall inflation has slowed down, prices of necessities such as groceries, rent, and medical care are much higher than they were three years ago, which is a source of public discontent and a political threat to Biden's re-election.

Most other indicators indicate that the U.S. economy is healthy: unemployment remains low, employment is strong, and consumers are traveling, dining out, and spending on entertainment. However, opinion polls show that the rise in inflation is affecting Biden's approval rating.

The Federal Reserve closely watches monthly inflation reports for signs of successful efforts to curb price increases. A 0.3% month-on-month increase in core CPI may be inconsistent with the Fed's 2% target and may be viewed as a disappointing data point by the market.

However, Fed officials tend to use a separate inflation gauge, the PCE price index, which is typically lower than CPI data.

Market participants believe that after the two-day policy meeting (just a few hours after the publication of May CPI data), officials are prepared to keep the benchmark rate at the 23-year high of 5.5% unchanged.

According to FactSet, lower gasoline prices will reduce the overall CPI month-on-month growth rate from 0.3% last month to 0.1%, the lowest level since October last year. It is expected that the overall CPI in May will increase by 3.4% compared to the same period last year, which is the same as in April.

Persistent high inflation poses a thorny challenge for the Fed, which seeks to slow borrowing and spending, cool the economy, and moderate the pace of price increases by raising rates. After rapidly raising the benchmark rate in 2022 and 2023, the Fed has kept it unchanged for close to a year. Higher rates, in turn, result in higher consumer and corporate borrowing costs for mortgages, auto loans, credit cards, and other forms of credit.

The longer the Fed keeps borrowing costs high, the more likely it is to over-tighten the economy and trigger a recession. However, there is a risk of reigniting inflation if rates are lowered too soon. Most decision-makers say they believe the Fed's tightening policy is slowing economic growth and should eventually tame inflation.

In the second half of last year, the US inflation rate steadily declined, which increased hopes that the Fed could achieve a "soft landing," that is, by raising interest rates to control inflation, without causing an economic downturn, which would be difficult and rare. However, the unexpectedly high inflation rate in the first three months of this year has led the market to delay its expectations for the Fed's interest rate cuts, which could jeopardize the economic soft landing.

In early May, Fed Chairman Powell stated that there needs to be more confidence that inflation will return to the target level before lowering the benchmark rate. Powell pointed out that it may take more time to gain this confidence than Fed officials previously thought. Several officials have recently said that they need to see low inflation for several months in a row.

In addition to the drop in gasoline prices, economists estimate that prices of several other goods, such as clothing, furniture, and new cars, will also fall from April to May. Although the price of used cars is expected to rebound after several months of decline, this may be temporary.

As the primary driver of inflation, apartment rent may cool slightly. According to Goldman Sachs economists, car insurance alone rose 1% from April to May, although this was lower than the 1.8% and 2.6% increases in the previous two months.

Some indicators suggest that inflation will continue to cool in the coming months. Americans, especially low-income families, are cutting back on spending. In response, several large retail and restaurant chains, including Walmart, Target, McDonald's, and Burger King, have announced price reductions or discounts.

Editor/new