CPI Data Will Arrive Just Before the Fed Meets. Will It Be a Game Changer?

Just hours before the release of the Federal Reserve’s latest rate decision, fresh inflation data showed that price increases slowed notably in May.

The new report is a sign that inflation is cooling again after proving sticky early in 2024, and it could help to inform Fed officials as they set out a future path for interest rates. Policymakers had embraced a rapid slowdown in price increases in 2023, but have turned more cautious after inflation progress stalled early this year. The latest data could help to restore their conviction that inflation is in the process of returning to the central bank’s goal.

Here’s what to know:

• Overall inflation cooled: The Consumer Price Index for May was up 3.3 percent from a year earlier, lower than the 3.4 percent economists had forecast and down from the April reading. And if you compared May prices just to the previous month, they did not climb at all.

• “Core” inflation also slowed: A closely watched measure that strips out volatile food and fuel prices to give a sense of the underlying trend climbed 3.4 percent from a year earlier, down from 3.6 percent the previous month and slower than economists had forecast. That was the slowest pace of increase since April 2021.

• This could be a big deal for the Fed. Central bankers will release their rate decision at 2 p.m., and while they are widely expected to leave interest rates unchanged this month, the fresh inflation data could feed into what they project for the rest of the year. Policymakers will publish their first economic forecasts since March alongside their policy statement. This report could help pave the way to earlier interest rate cuts.

• What economists are saying: “This is kind of great, but it is one month,” said Michael Feroli, chief U.S. economist at J.P. Morgan. He said that the Fed is unlikely to cut interest rates this summer on the basis of just this inflation report. He expects a November rate cut, but following Wednesday’s report he could see a case for September. “This definitely fits with the ‘bumps in the road’ narrative,” he said, explaining that the early 2024 inflation stubbornness now looks like less of a lasting issue.

• Inflation is down sharply from its peak. While today’s inflation rate is faster than the 2 percent that was normal before the pandemic, it is much slower than the 9.1 percent that overall inflation reached in 2022. The Fed aims for 2 percent inflation, though it defines that measure using the Personal Consumption Expenditures index. Data from the C.P.I. release feeds into that report, which comes out with more of a delay — not until June 28 this month.

• Where is the cool-down coming from? Car insurance price increases surprised economists by slowing sharply last month from April, and hotel and flight prices were cheaper. Rent inflation remains stubborn, but forecasters expect it to begin slowing soon. Apparel prices declined on a monthly basis, and grocery inflation was moderate.