A soft core print takes the sting out of a 4% handle for US CPI
Headline US inflation met expectations in May, with headline CPI rising 0.5% MoM to leave the annual rate at 4.2%, the highest since April 2023 and a third consecutive acceleration.
More importantly, core prices increased just 0.2% MoM, undershooting the 0.3% expected, rising at just half of April's pace. Given the strength seen across recent labour market readings, we still think inflation remains the primary concern for FOMC voters. But the modest pace of price increases seen through May should help to assuage any immediate concerns.
Unsurprisingly, given continued disruption to shipping via the Strait of Hormuz, energy costs jumped 3.9% on the month, accounting for over 60% of the headline gain, with gasoline now up 40% YoY.
Signs of second-round effects remain scarce, however, with shelter components rising just 0.3%, while transportation services fell 0.6%, suggesting elevated fuel costs are not yet bleeding into the broader basket. Core goods prices fell 0.1% MoM, belying any indications of supply chain pressures.
For the FOMC, this is close to a best-case print under the circumstances.
Having seen markets close to fully pricing at least one hike this year, this soft core reading buys Chair Warsh some breathing room, even if a hold next week was never seriously in doubt. The market reaction has accordingly been muted, albeit modestly dollar-negative, seeing the DXY slip back from the 100 handle it had threatened post-payrolls. Still, with an FOMC decision looming and Middle East risks still skewing energy prices higher, we continue to see the path of least resistance for the greenback pointing upward into next week.