US CPI Preview: Inflation Expected to Pick Up Again
Original author: Justin Low, Forex Factory
Link to the original article: https://www.forexfactory.com/news/1351234-us-cpi-preview-inflation-set-to-pick-up
Overview
As markets gear up for the latest US Consumer Price Index (CPI) report, expectations point toward a slight uptick in inflation, which may affect the Federal Reserve’s monetary policy outlook. The data, scheduled for release on Tuesday at 12:30 GMT (8:30 am Eastern Time), will be critical for investors, economists, and policymakers, especially as it coincides with the start of the FOMC’s two-day policy meeting.
Key CPI Data Forecasts
Analysts have outlined the following expectations for the May CPI print, based on consensus forecasts:
– Headline CPI (month-on-month): 0.1% (prior: 0.3%)
– Core CPI (month-on-month): 0.3% (prior: 0.3%)
– Headline CPI (year-on-year): 3.4% (prior: 3.4%)
– Core CPI (year-on-year): 3.5% (prior: 3.6%)
Although headline inflation is expected to show signs of softening on a monthly basis, the annual rate remains unchanged. The core CPI, which strips out volatile food and energy prices and is a key gauge for underlying inflationary pressure, is projected to rise 0.3% over the month, leading to a modest decline in the year-on-year rate from 3.6% to 3.5%.
Market Context and Implications
Financial markets are watching this report closely, particularly as it arrives just before the June Federal Open Market Committee (FOMC) policy decision. While there’s little chance of a rate cut at this meeting, the CPI data could influence the Fed’s updated economic projections and its “dot plot,” which outlines the future path of interest rates.
Key areas of focus include:
– Whether inflation is resuming a downward trend after a sticky first quarter
– Clarity on price pressures in crucial sectors such as shelter, medical care, and transportation
– Signs that would support or delay potential interest rate cuts later this year
Recent Economic Backdrop
Since the start of 2024, inflation metrics have been persistent. Earlier in the year, sticky data from January to March raised concerns among investors and analysts about whether progress on disinflation had stalled. However, the April CPI data showed more favorable signs:
– Headline CPI increased by 0.3% in April, a slowdown from 0.4% in March
– Core CPI rose just 0.3%, down from previous months
– The shelter index, long a driver of inflation, increased more slowly
The May data will lend more evidence to whether April was a turning point or simply a temporary reprieve from earlier inflationary pressures.
Expectations for Core Components
As part of the CPI, analysts particularly focus on core services excluding shelter, a gauge closely tracked by Federal Reserve officials. This category includes items such as:
– Medical care services
– Transportation services
– Recreation services
So far, inflation in this subset has remained sticky, even as goods inflation has cooled. The ongoing demand for services, partly driven by strength in the labor market, seems to be contributing to higher-than-desired inflation in these areas.
Energy and Food Prices
Two important variables with significant monthly volatility, energy and food, are influencing the headline CPI:
– Gasoline prices are expected to have declined in May based on industry data, helping pull down the headline number
– Food prices are forecasted to remain stable or increase only modestly, further easing pressures on the headline figure
If these expectations hold, they will support the narrative that inflation is slowly easing, even if the pace is not as fast as the Fed might prefer.
Shelter Inflation: The Key
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