US inflation continued to fall, with both overall and core indicators rising less than expected, which was a "pleasant surprise" for Federal Reserve officials looking for evidence of interest rate cuts.
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On Wednesday, June 12th, the US Bureau of Labor Statistics released data showing that the US CPI increased by 3.3% year-on-year in May, slightly lower than the previous value and expected value of 3.4%; The month-on-month growth of May's CPI was 0%, lower than the expected 0.1%, and also significantly slower than the previous value, the lowest since July 2022. Energy is still the biggest factor dragging the CPI up month-on-month.
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Excluding food and energy costs, May's core CPI rose 3.4% year-on-year, lower than expected 3.5% and lower than the previous 3.6%, the lowest level in more than three years; the month-on-month core CPI growth rate fell from April's 0.3% to about 0.2% (actual value 0.16%), weaker than the expected 0.3%.
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The Federal Reserve's focus on super core inflation has also cooled somewhat, falling 0.05% month-on-month, the first decrease since September 2021, driven by a decline in transportation service costs, but still higher than last year's level of 5.0%.
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After the data release, traders have re-digested the possibility of a November rate cut by the Federal Reserve and expect two 25 basis point rate cuts within the year. Traders also raised the probability of a rate cut in September to 72%. Meanwhile, the swap market shows a 100% probability of a rate cut in November.
The three major US stock indices rose in early trading, with the Dow up 0.77%, the Nasdaq up 1.35%, and the S&P 500 up 0.92% as of the time of publication.
Energy inflation fell, housing price growth rate declined, and core service inflation slowed down significantly month-on-month.
Looking at different sectors, the rise in housing costs is still the biggest obstacle to the downward trend of inflation, while the acceleration of the decline in energy prices has slowed down inflation:
The energy index fell 2% this month, the gasoline index fell 3.6%, and the fuel index fell 0.4%.
Housing costs are the largest category in the service sector, rising by 0.4% for the fourth consecutive month. Transportation services, after rising by 0.9% in the previous month, fell by 0.5% in May.
The new car index fell by 0.5% month-on-month, the second-hand car index reversed its downward trend, and the prices of medical and nursing commodities rose sharply by 1.4%.
It is worth mentioning that the core service inflation has slowed down significantly month-on-month, and the prices of services other than housing and energy are basically flat compared to April, the lowest level since September 2021.
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Housing inflation, which accounts for a large proportion of CPI, slowed, rising 0.4% month-on-month. Among them, the housing inflation rate fell 5.41% year-on-year, the lowest level since April 2022; the rent inflation rate fell 5.30% year-on-year, the lowest level since May 2022.
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Overall, service sector inflation remains above 5%, while commodity inflation is at its lowest level since January 2004.
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Expectations of a Federal Reserve rate cut in September are rising.
Gregory Faranello, head of US rate trading and strategy at investment firm AmeriVet Securities, said:
The May CPI report is a "very good inflation data," and the trend is expected to continue. Today's Fed meeting should see officials "move toward two rate cuts in 2024," and the current weaker CPI data will continue to increase expectations of a rate cut in September.
Analyst Cameron Crise pointed out:
The CPI data brought the long-awaited downward surprise to bond bulls and the Fed. Both overall and core CPI were 0.1% lower than expected, and given the gap between actual and forecast figures, this error seems reasonable.
In fact, the core index rose by only 0.1% after rounding to the nearest hundredth. The super core service industry excluding housing fell by 0.04%, the first negative growth since September 2021. This makes it possible for two rate cuts in 2024 and opens the door for more rate cuts to be priced in the market in 2025.
Mona Mahajan, senior investment strategist at Edward Jones, believes that the Federal Reserve will need 2-3 soft data points to cut interest rates:
This can reset the plan for the Federal Reserve. They still want to see two to three data points moving in the right direction before they gain the confidence they need to really start sending out signals that they will cut rates. We are still waiting for a significant decline in housing and rent, and we are also paying attention to the cooling of the labor market and wage growth.
This report was released just a few hours before the announcement of the FOMC decision by the Federal Reserve. It is generally expected that Fed officials will maintain interest rates at their 20-year high for the seventh consecutive time, and will also release the latest "dot plot" and quarterly economic forecasts.
Federal Reserve officials can still adjust quarterly economic forecasts based on CPI data, Federal Reserve Chairman Powell said, adjusting when important data is released during the meeting, which has happened before.
Edited by Jeffrey