Last week we had a meeting of the Federal Reserve Board’s Open Market Committee and the release of the latest inflation data. Curious about the direction of interest rates? These two events represent bellwethers in this regard. We are looking to the Fed for signals as to when they might take their foot off the high interest rate pedal. And the Fed is looking closely at the inflation data for signs of progress which would enable them to ease up.

How did these inflation reports come in? First the consumer price index (CPI) was released, and it showed no increase month-over-month and 3.3% year-over-year. At the core level excluding food and energy, these numbers were 0.2% and 3.4%, respectively. The next day the producer price index was released and showed similar positive progress against inflation. Overall, these reports represented good news, though the Fed was cautious in their statement after their meeting this past week.

Now we must point out that these reports are not the only ones the Fed is watching. For example, the previous week the employment report featured a release on wage inflation. And the last week in May we had the personal consumption expenditures price index (PCE). But the CPI is considered the “headline” report. When the Fed met last week, they did not make a move on interest rates, as expected. And they talked about needing to see more progress against inflation – also expected. So, there you have it – these inflation reports are the key to seeing lower interest rates. Did we see progress? The answer is yes, but not enough for the Fed to declare victory.