• Both headline and core CPI rose 0.1% in May
  • Headline inflation slowed to 1.8% year-over-year and core dipped to 2.0%; both were a tick below consensus
  • Higher food prices helped to offset a dip in energy prices in May
  • Among the core components, an increase in medical care services prices was offset by a further decline in goods prices
  • Core CPI inflation has been within 0.4 ppts of the 2% mark since 2011. The PCE deflator, the Fed’s preferred price measure, has been a few ticks lower on average and stood at 1.6% in April.

Today’s inflation report keeps the Fed’s options open. With the US economy showing few signs of inflationary pressure (at least from a consumer price standpoint), the central bank has leeway to respond to any slowdown in growth caused by tariffs and trade policy uncertainty. We don’t think the data makes enough of a case for rate cuts at this stage, though we are beginning to see cracks in the industrial sector and business investment. Greater evidence of trade headwinds impacting the broader economy would help build the case for a move. The near-term direction of monetary policy might also depend on whether the Trump administration announces additional trade action following the G20 summit later this month. Further escalation of the US-China trade dispute would increase the likelihood of a pre-emptive move from the Fed. Markets don’t appear to have high hopes for a potential Trump-Xi meeting, fully discounting a rate cut at the Fed’s July meeting and pricing in another move by October.

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