The US Department of Labor announced on Wednesday that the Consumer Price Index (CPI) for May did not accelerate, and there were signs of some cooling in inflation, which futures market traders have completely absorbed the expectation of two interest rate cuts this year.

Data from the Bureau of Labor Statistics shows that CPI was unchanged from last month and increased by 3.3% year-on-year. CPI is a broad gauge inflation indicator that measures the cost of a basket of goods and services in the US economy. Economists had previously expected a monthly increase of 0.1% and an annual increase of 3.4%.

Excluding volatile food and energy prices, core CPI rose 0.2% month-on-month and 3.4% year-on-year, compared with previous estimates of 0.3% and 3.5% respectively.

After the report was released, stock futures rose, while US Treasury yields fell. Although overall inflation data for all items and core indicators have declined, housing inflation has risen 0.4% month-on-month and 5.4% year-on-year. Housing-related data has always been a key issue for the Fed in combating inflation and has a large weight in the CPI.

However, due to a 2% decrease in energy prices and only a 0.1% increase in food prices, price increases were suppressed. In the energy sector, natural gas prices fell 3.6%. Another headache for inflation is auto insurance, with a monthly decrease of 0.1%, but still a year-on-year increase of more than 20%.

At the time of this data release, the US economy is at an important juncture, as the Fed is weighing its next move in its monetary policy, which will largely depend on the direction of inflation.

Later on Wednesday, the Federal Open Market Committee, which sets rates, will conclude its two-day policy meeting. The market generally expects the Fed to maintain its target range for the federal funds rate at 5.25%-5.5%, but will also look for clues about the Fed's trend.

Persistent inflation since the Fed last raised rates in July 2023 has kept the Fed vigilant. At its March meeting, FOMC members said they could cut rates three times this year, a total of 0.75 percentage points, but expected to lower the magnitude of the rate cut to two or even one.

In addition, committee members will update their forecasts for GDP growth, inflation, and the unemployment rate, all of which could be affected by CPI data. Economists expect the Fed to raise its inflation expectations and lower its outlook for overall economic growth reflected in GDP.

Although the Fed does not use CPI as its main inflation indicator, it is still one of the considerations. Policymakers are more interested in the Personal Consumption Expenditures Price Index from the Department of Commerce, a broader measure of consumer behavior changes.

UBS said that although investors generally agreed that the Fed would maintain interest rates on Wednesday, Wednesday would still be a key day for setting a recent tone for the market. However, “the most concrete measure for investors will be the dot chart released quarterly, which depicts the outlook for interest rates of senior Fed officials,” the bank said. “If the dot chart barely avoids a hint of a rate cut, it may trigger more anxiety, as this implies a policy bias towards being more bullish.”

Edited by Jeffrey