U.S. core CPI for May came in slightly softer than anticipated, up +0.2% month-over-month (MoM) and up +2.9% year-over-year (YoY); consensus was for increases of +0.3% and +2.9%, respectively. Headline CPI eased to +0.5% for the month following a +0.9% jump in March and a +0.6% increase in April, but the measure was up +4.2% YoY – the highest since 2023.
Energy drove 60% of the move in May’s headline inflation, up +3.9% for the month, led by gasoline prices, which were +7.0% higher. Energy prices in aggregate were up a whopping +23.5% YoY and are likely to remain elevated given the lack of progress toward a broad reopening of the Strait of Hormuz. Thankfully for consumers, food costs moderated in May, up only +0.2%, led by higher prices for food away from home.
Shelter prices were also softer, up +0.3% MoM compared with an anomalous increase of +0.5% in April. Other areas of improvement included new and used vehicles (-0.3% and +0.1% MoM, respectively), apparel (+0.3%), home furnishings (-0.2%), and car insurance (-1.7%); drug prices, both branded and generic, were also lower for the fifth straight month. Notable increases included airfares (+2.7%) on higher jet fuel costs and tax preparation (+12%), perhaps due to the incorporation of changes stemming from the OBBBA.
In our view, there are two main takeaways from today’s release. First, pressure from the more hawkish cohort within the Federal Open Market Committee is likely to ease heading into next week’s meeting. While three consecutive strong labor prints have laid the easing bias to rest, this core CPI report should allow the Fed to hold rates steady through the summer – especially if a more constructive tone emerges in Middle East negotiations in the coming weeks. Second, the U.S. consumer has been very resilient, but that durability is being further tested. While consumer confidence measures have been underwhelming for months, the U.S. consumer will need to digest prices that are rising at a +4.2% annual rate while wages are up only +3.4%. Wage growth created a cushion for consumers during the post-pandemic inflation surge, but a very different supply-demand dynamic within the U.S. labor market is unlikely to provide the same level of support over the coming months.
As a result, we reiterate our recently revised expectation for the Fed to remain on hold through the end of 2026, with the potential for two interest rate cuts in the first half of 2027 as inflation moderates through the back half of 2026. Strong U.S. economic growth, driven by capital expenditure, should continue, but it bears watching the continued impact of higher prices on the U.S. consumer, as this dynamic could create a modest offset to that growth. Yields reacted positively to today’s announcement, and we continue to see opportunities to invest in the short end of the yield curve given our view that a protracted global rate-hiking cycle is not at hand. Equity volatility, however, could rise over the next several weeks, as a sharp bounce from the March bottom has created pockets of froth. We recommend investors remain disciplined in their equity positioning and take advantage of periods of volatility to rebalance their portfolios in line with their long-term strategic targets.