The May CPI inflation reading surprised investors, who had expected significantly higher figures than April's due to rising business costs and base effects. However, inflation didn't climb as anticipated. What's more, core inflation remained unchanged year-on-year. So, what do we need to know about today's inflation report?
- The headline inflation reading edged up minimally to 2.4% year-on-year.
- Core inflation stayed at 2.8% year-on-year, though this is still considered elevated.
- Monthly dynamics were significantly lower than expected, coming in at 0.1% month-on-month.
- Companies have partially started passing on tariff costs to consumers, but to a lesser extent than anticipated.
- On both a yearly and monthly basis, overall inflation was primarily reduced by lower fuel costs and cheaper clothing prices.
- The main contributor to inflation remains rental inflation, though its share in overall inflation is decreasing in favor of other categories.
- Food prices, utilities like electricity and gas, medical service costs, and transportation costs are all rebounding.
Rents remain the primary component of inflation. However, food, medical service costs, and utility bills are increasingly gaining weight. Source: Macrobond, XTB
Inflation was curbed by lower fuel prices, which reduced the annual reading by nearly 0.4 percentage points! Source: Macrobond, XTB
On a monthly basis, transportation costs and food prices are rebounding, although rental inflation remains the primary component. Source: Macrobond, XTB
Food inflation is also starting to rebound, considering the ongoing recovery in global food prices. Source: Macrobond, XTB Research
Used car inflation has slowed down slightly, but prices could rise due to increased demand as new car prices climb, driven by tariffs. Source: Macrobond, XTB
We're also seeing a rebound in services inflation after recent significant declines, especially when excluding rents. This suggests that service costs could increase in the coming months, driven by rising expenses related to tariffs. Source: Macrobond, XTB
Lower Inflation Boosts Odds of Rate Cuts
Today's lower inflation reading increases the chances of interest rate cuts this year. Yesterday, the market priced in a 65% probability of a rate cut in September, but that has now climbed to 80%. Of course, we're awaiting further news regarding the trade agreement between the US and China, and how negotiations will unfold between the US, Europe, and other countries, especially with the expiration of suspended tariffs in early July. It's worth noting that a US appeals court has permitted broad tariffs of 10% to be collected in the US.
EURUSD is rebounding sharply, along with a strong increase in bond prices, following the lower-than-expected US inflation reading. Source: xStation5
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