Credit Ágricole: US May CPI - FJElite
- US headline CPI came out at 4.25% YoY in May, modestly below our forecast (4.30%) but modestly above the Bloomberg average consensus (4.21%). The market was pricing 4.27% the day before the release.
- Core inflation came out at 0.21% MoM SA, 4bp above our below-consensus 0.17% take but 6bp below the Bloomberg average consensus of 0.27%. Taking this into account, the 3M ma annualised core held roughly steady at 3.17% in May compared to 3.20% in April.
- Within core, core goods were on the softer side overall, with limited evidence of any significant pass-through from the surge in energy prices, while services prices were a bit firmer, with OER and rent stronger than we had anticipated (albeit down from last month’s effectively ‘double’ MoM print due to how the BLS approached the government shutdown).
- Overall, however, the bottom line is that core surprised to the downside, relatively in line with our take. Services were admittedly more resilient, but core goods are still exhibiting no real signs of pass-through from energy prices, resulting in a relatively benign core reading this month.
- Looking ahead, we will of course fine-tune our forecasts as usual, but for now we see May as likely representing the peak in YoY headline CPI and remain comfortable with our view that core may hover in a roughly 2.7-3.0% range for the remainder of the year.
- In terms of PCE, we will have to wait for the May PPI report to finalise expectations, though we will note that neither the firm medical care services CPI (0.5% MoM) nor the strong airfares (2.7% MoM) will flow into PCE, as those are sourced from PPI. Also a positive for PCE is that computer software & accessories, which has a much larger weight in PCE vs CPI and therefore plays a larger role in the former, slowed sharply to 0.0% MoM after consecutive increases of 4.0% MoM in March and 5.0% MoM in April.
- For the Fed, we do not think the report is a horrible one overall. While the continued surge in headline inflation is obviously not ideal and is an unwelcome development that the Fed will not ignore, we remain of the view that core inflation may end up being the more important metric. With this measure relatively benign on the month, offering few signs of second round effects aside from the further rise in airfares, we think the majority of the FOMC will still be comfortable on hold for now, rather than advocating for an imminent return to rate hikes.