U.S.: Goldilocks Scenario for U.S. Consumer Price Inflation

• U.S. headline inflation rose by a meagre 0.1% M/ M, bringing the annual pace of price deflation to 1.3%.
• Core consumer prices were also quite soft, rising by 0.1% M/M with annual core inflation easing to 1.8%.
• Prices were weaker across the board, with only energy prices showing any meaningful gain.

U.S. consumer prices were much softer than expected in May, with the headline index rising by only 0.1% M/M (0.096% M/M at 3 decimal places) following the flat print the month before. This was much less than the market consensus for a 0.3% M/M gain. On an annual basis, the pace of consumer price deflation accelerated to 1.3%, which is down from the 0.7% Y/Y drop recorded in April. The decline in consumer prices was much bigger than the 0.9% Y/Y drop expected by the markets and was the largest pace of consumer price deflation since April 1950.

Core consumer prices were also quite soft, rising by only 0.1% M/M (0.145% M/M at 3 decimal places), with the annual pace of core consumer inflation easing to 1.8%. This was inline with the market consensus. Despite the recent moderation in core CPI the 3-month and 6-month annualised trend for both indicators remain relatively elevated at 2.3% and 1.9%, respectively.

The details of the report underscored the mounting downward pressure on U.S. consumer prices from the growing domestic economic slack. Indeed, outside of the 3.1% M/M gain in gasoline prices and the 0.5% M/M gain in vehicle prices, which combined to push transportation costs up 0.8% M/M, there was broad-based softness in most other categories. The price for food (down 0.2% M/M), apparel (down 0.2% M/M), housing (down 0.1% M/M, though owners' equivalent rent rose 0.1% M/M), and other goods and services (down 0.2% M/M) declined.

On the whole, this report provides further evidence to dispel the growing concerns in the markets about inflation as the broad-based nature of the moderation in consumer prices continue to point to the underlying weakness in the pricing power of workers and businesses alike, on account of the weakening domestic economy. On the other hand, we are equally sceptical that prices will enter a deflation spiral. As such, it does appear that U.S. consumer prices remains in a bit of a sweet spot; not too hot, and not too cold.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.