MUFG on Upcoming US CPI Report - FJElite
Today’s US CPI report is the most consequential data release ahead of the upcoming FOMC meeting. Consensus expects headline inflation to breach 4% YoY for the first time since 2023, driven primarily by the energy price shock stemming from the Middle East conflict. While this move appears significant on the surface, May 2025 delivered the softest CPI print of 2025, creating a low base that mechanically lifts the year-on- year comparison even if underlying inflation remains moderate. That said, the primary driver of the expected rise in headline inflation is energy prices. While weekly gasoline prices have begun to ease in recent weeks, this recent decline is unlikely to materially impact the May CPI report. Beyond headline inflation, there are signs of a risk of broadening inflationary pressure. Core CPI picked up in April marking a modest reacceleration. Services and shelter remain the stickier components, consistent with the pattern observed since 2023. So far, the re-acceleration is modest and concentrated.
A hot print CPI (>4.3%) today would likely trigger a sharp sell-off in US front-end rates as markets price in a higher probability of further Fed tightening, potentially pulling forward expectations for a hike towards October. The USD would rally on widening rate differentials, pushing USD/JPY up towards 161.00-162.00. While a soft print (<4.0%) would trigger a lower Us yields and a weaker US dollar pulling USD/JPY back below 160.00. Looking at alternative data indicates upside risks. Transaction data from major US retailers shows rising average transaction values and resilient sales despite weaker foot traffic, suggesting ongoing price pass-through, particularly in food and core goods. Taken together, while base effects will exaggerate the YoY increase, underlying signals point to persistent inflation pressures. With the distribution of outcomes unusually wide, today’s CPI release carries heightened potential for outsized market moves relative to recent data prints.