U.S. Inflation Rate Expected To Remain Stable In May Before Fed Rate Decision

The US Consumer Price Index (CPI) is expected to rise 3.4% year-on-year in May, unchanged from the previous value.

The core CPI is expected to fall from 3.6% to 3.5% on an annual basis.

Inflation data may affect the value of the dollar and expectations of a September rate cut.

The US Bureau of Labor Statistics will release the much-anticipated US Consumer Price Index (CPI) at 20:30 Beijing time on Wednesday.

Any surprises in the report could have a huge impact on the market’s pricing of the Fed’s expectations for a September rate cut, which in turn could exacerbate dollar volatility.

What to expect from the report?

The US CPI is expected to rise 3.4% year-on-year in May, unchanged from the previous value. The core CPI (excluding volatile food and energy prices) is expected to record an annual rate of 3.5%, compared with 3.6% in the previous value.

Meanwhile, the CPI is expected to rise 0.1% on a monthly basis, compared with 0.3% in the previous value. The core CPI may remain stable at 0.3% on a monthly basis.

Just one day before the release of the April CPI data, Federal Reserve Chairman Jerome Powell spoke at a moderated discussion at the Foreign Bankers Association’s annual conference in Amsterdam. Powell turned dovish on the outlook for interest rates, noting that “there is less confidence than before that inflation is coming back down. I am not as confident of that as I was before”.

“I think the next step is less likely to be a rate hike, and it is more likely that we will keep the policy rate where it is,” Powell added.

Softer headline and core CPI inflation in April provided the basis for Powell’s comments. A slew of US business activity and employment data has since added credibility to the market’s pricing of a September rate cut by the Fed.

However, a strong US labor market report released last Friday changed the picture, showing that nonfarm payrolls increased by 272,000 jobs last month, compared with expectations for an increase of 185,000. Average hourly earnings rose 4.1% year-on-year in the same period, compared with a 4% increase in April, higher than the expected 3.9% increase.

The data pointed to continued tight US labor market conditions and rising wage inflation, thus weakening bets on a September rate cut by the Fed. According to CME Group’s FedWatch Tool, the market cut bets on a 25 basis point (bps) rate cut in September to 43% from about 55% before the report, according to Reuters.

In previewing the May inflation report, “we expect next week’s CPI report to show that core inflation slowed again to 0.3% in May after a higher increase of 0.29% in April.” “Headline inflation is likely to be lower at 0.1% as energy prices are likely to have significantly eased inflationary pressures,” analysts at TD Securities said in a weekly note.

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