US Inflation Falls but Interest Rates Held

The US Labor Department published US Consumer Prices Index (CPI) inflation for May 2024 late yesterday (UK time).  US core inflation has again fallen by 0.1% pa from 3.4% pa to 3.3% pa.  This is the second monthly fall of 0.1% pa.  US inflation is proving stubborn and slow to fall given the US economy has been resilient to higher interest rates.

On the same day, the Federal Reserve maintained interest rates in a range of 5.25% to 5.5% pa.  This is the highest rate for 23 years and has been held at this level since July 2023.  Interest rates have been held given the resilient economy but there are signs that the economy is slowing down with unemployment starting to climb.

The Federal Reserve did give a steer and changed its position in that that it will likely make one interest rate cut in 2024.

Comment

We have long said that we do not expect interest rates to be cut until Autumn 2024 although it could be as early as September. 

Why are we forecasting Autumn?  The UK energy price cap reduces in July meaning that July’s inflation should be lower, but figures will not be published until August 2024.  This means that the Bank of England interest rates announcement due on 1^st August will not have the benefit of knowing July inflation figures, so our best guess will be the next rate decision on 19^th September 2024.

In the US, inflation has proved stubborn, so we expect rate cuts at a similar time in both the US and the UK.