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US Inflation Dips Unexpectedly to 3.3% in May, Fed Remains Cautious

  • US inflation and core inflation declines in May
  • Federal Reserve holds rates as expected
  • US dollar retreats against the majors, US stock market jumps

There was good news on the inflation front, as inflation decelerated in May and was lower than anticipated. This points to inflationary pressures easing, which is what the Federal Reserve wants to see before lowering interest rates.

The US consumer price index (CPI) climbed 3.3% year-on-year in May, down from 3.4% in February and below the market estimate of 3.4%. This was the lowest rate in three months. Food and shelter inflation fell while energy costs were higher. On a monthly basis, CPI came in at 0%, down from 0.3% in May and below the market estimate of 0.1%.

Core CPI, which excludes food and energy and is considered a better gauge of inflation trends, dropped to 3.4% year-on-year, down from 3.6% in April. Monthly, core CPI was flat at 0%, down from 0.3% in April and lower than the market estimate of 0.3%. This was the lowest rate in seven months.

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    Federal Reserve Holds Rates, Expects Only One Cut This Year 

    The Federal Reserve maintained its key interest rate on Wednesday in a widely expected decision. The Fed has now kept the benchmark rate at 5.25% to 5.5% for seven consecutive meetings.

    The rate statement noted that “inflation has eased over the past year but remains elevated”, which was similar language to the April statement. However, the new statement added that there had been “modest further” progress towards the Fed’s 2% inflation target. This was more dovish than the April statement, which said that there had been a “a lack of further progress” on inflation.

    At yesterday’s meeting, the Fed projected just one rate cut before the end of the year. In December 2023 the Fed was much more dovish and had projected three rate cuts in 2024, but stubborn inflation has forced the Fed to delay rate cuts. The weaker-than-expected inflation report on Wednesday has boosted rate-cut expectations and the markets have priced in rate cuts in September and December.

    US Dollar Slips, Stock Markets Surge After Inflation Report 

    The unexpectedly soft inflation report and the dovish Fed rate sent the US Dollar sharply lower against most of the majors, while the US stock market posted sharp gains on Wednesday.

    The US dollar posted losses against all the major currencies in the aftermath of the inflation release. The AUD/USD currency pair showed the sharpest move and climbed 0.87% on Wednesday. The US dollar has stabilized on Thursday at the time of writing.

    The US stock markets surged on Wednesday in reaction to the inflation report. The Nasdaq 100 Index climbed 264.89 points (1.53%) and closed at 17,608.44. The S&P 500 Index climbed 45.71 points (0.85%) and closed at 5,421.03.

    Kenny Fisher
    About Kenny Fisher
    Kenny started his career in forex working in the sales and marketing department at a major forex broker and has worked as a market analyst for 12 years. With a legal editing background, Kenny has combined his writing skills and finance expertise to produce top-quality articles. Kenny covers a wide range of topics, including global stock markets, commodities and currencies, with focus on fundamental and macro-economic analysis. Kenny’s articles have been carried by Oanda,, Seeking Alpha and FXStreet. Kenny holds a Bachelor of Law from Ogoode Hall Law School in Toronto, Canada.

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