Exploring Economic Indicators: Inflation and Consumer Sentiment

Economic indicators provide insight into the overall health and performance of an economy. They are essential tools for policymakers, advisors, investors, and businesses because they allow them to make informed decisions regarding business strategies and financial markets. In the week ending on June 13th, the SPDR S&P 500 ETF Trust (SPY) rose 1.46% while the Invesco S&P 500® Equal Weight ETF (RSP) was down 0.21%.

Inflation has been an ongoing topic of conversation over the last few years because of its role in the Fed’s interest rate policy and its ability to quickly influence financial markets. The Fed has been reluctant to make any changes to monetary policy, emphasizing the need for more data and confidence that inflation is moving towards their 2% target. At their meeting last week, the Fed voted to keep interest rates between 5.25% and 5.50% for a seventh consecutive meeting and expects only one rate cut for 2024. This article looks to summarize three important economic indicators from the past week to provide insight into the latest trends in inflation and consumer sentiment.

Economic Indicators: Consumer Price Index

Inflation continued to show signs of easing last month, even surprising to the downside, after several higher-than-expected readings to start off the year. The Consumer Price Index (CPI) rose 3.3% in May, down from 3.4% in April and below the expected 3.4% rise. Compared to the previous month, consumer prices were flat, which was lower than the expected 0.1% growth. In May, gas prices finally offered some relief to consumers’ wallets, dropping 3.6% from April and helping to slow inflation. However, the continued rise in shelter costs more than offset the decline in gasoline, as shelter costs rose 0.4% for a fourth consecutive month.

Core inflation, which excludes food and energy prices, cooled to its lowest level in over three years. Core CPI fell to 3.4% on an annual basis, coming in below the expected 3.5% growth. Additionally, core prices increased 0.2% from April, lower than the expected 0.3% growth.

It is still up for debate as to when the Fed will begin to cut rates. It’s still expected that the Fed will hold rates steady at their next meeting in July. And as previously mentioned, the Fed only expects one rate cut in 2024 according to their latest dot plot. At the time of writing, the CME Fed Watch Tool indicates a 90% likelihood for rate stability at the July meeting. However, the latest CPI numbers support the belief that two rate cuts this year remain a very real possibility. The CME Fed Watch Tool is currently showing a 61% probability that the first rate cut will take place in September with a December rate cut also on the table.