EconoFACTS

June 12, 2024 | 09:46

U.S. CPI Inflation Undershoots in May

Economist

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

U.S. CPI inflation stalled in May, coming in at a better than expected 0.0% and down from 0.3% in April. This was the best monthly CPI inflation performance since July 2022. The reading was below the consensus forecast of 0.1% and there was a softer pattern to the individual price categories that was very Fed friendly. This report builds the case that inflation has resumed its downward path after an unanticipated surge in the first quarter. S&P 500 equity futures prices were trading about a three-quarters of a percentage point higher on the news. Treasury bonds are rallying with the 2-year yield trading down 13 basis points and the 10-year yield down 11 bps. The Fed funds futures market is solidifying around a Fed rate cut at the September meeting in the wake of this softer report.

The details of the report were much better than in April. Energy prices declined 2.0% with gasoline prices plunging 3.6%. Utility electricity prices were flat and natural gas prices dropped 0.8%. Goods prices excluding food and energy were unchanged with new vehicle prices dropping 0.5% and apparel prices down 0.3%. Food inflation was up a modest 0.1% with grocery prices unchanged. Services less energy services moderated to 0.2% from 0.4% in April with medical care services inflation moderating to 0.3% from 0.4%. Airline fares fell 3.6%, and recreation prices dropped 0.2%. The lone major category that didn’t budge was shelter with inflation holding at a stubbornly high 0.4%, where it has been over the last four months. From a year ago, headline CPI inflation was also below forecasts, slowing to 3.3% from 3.4% in April.

Core CPI inflation, excluding food and energy, increased a moderate 0.2% last month (or 0.16%), below the consensus forecast of 0.3%, and the best monthly performance since August 2021. From a year ago, core inflation slipped by two tenths of a percentage point to 3.4% from 3.6%. The three-month moving average of the core and super-core CPI inflation rate is looking much better, slipping to 3.3% annualized on the core and 4.2% on the super-core. The Fed will likely need to see another couple of months of inflation moderation to give the all-clear to cut interest rates in September.

Bottom Line: The CPI report for May came in a bit better than we dared hope for given the string of disappointing readings to start the year. If sustained, it will keep Fed rate-cut expectations that we have penciled in for September and December alive and well. Restrictive monetary policy has more work to do, and the Fed will remain patient and watchful. However, today’s far softer CPI report will go a long way in making the case that it can soon safely ease off the monetary brake pedal without risking another inflation episode.

Table 1 - United States — CPI

(month/month % change : s.a.)

Source: BMO Economics, Haver Analytics