We get the biggest risk event of the week with the latest US CPI inflation released today, while Thursday sees the PPI figures. This data combined will form the next reading of the Fed’s favoured price pressure metric, the core PCE deflator, that lands at the end of the month following next week’s FOMC meeting. Markets have been treading water in recent sessions as investors and traders awaited news from the latest US-China trade talks, but all eyes will be on the CPI data to assess if the tariffs imposed in April are affecting consumer prices, and especially goods inflation.
Most economists expect firms to gradually pass through the rising tariff costs to core goods and food prices, but also that services inflation will continue to moderate. For this release, consensus expects the headline number to rise +0.2% m/m in May, unchanged from April, and 2.4% y/y, which would be a rise of one-tenth from a month earlier. The core rate, which strips out volatile food and energy prices, is forecast to pick up to +0.3% m/m versus +0.2% prior and 2.9% y/y from 2.8% in April.
The monthly core reading is the main one markets look out for and has recently printed lower than the 0.17% number needed over a period of time to hit the Fed’s 2% inflation target. There is some uncertainty around if it is too early for the trade levies to be completely reflected in the May data. Pre-emptive price hikes haven’t shown up fully while seasonal factors may play a part too, as a fall in vehicle prices will likely prevent a bigger overall increase in goods inflation.
Other price gauges and Fedspeak
Going forward, higher prices are fully expected in the coming months, with the latest Fed Beige Book signalling costs and prices are to rise at a faster rate going forward. May’s ISM PMI surveys showed price components remain elevated with services prices paid rising to 68.7 from 65.1. Obviously, the fear is with tariffs raising business costs, many firms are likely to pass these on to consumers, which the Fed will consider in its policy deliberations.
Fed officials are now in the blackout period ahead of next Wednesday’s FOMC meeting.  But we’ve heard from numerous policymakers recently. Goolsbee has warned April’s inflation data might be the “last vestige” of lower inflation before tariff impacts emerge. He is cautious about calling tariff effects transitory, while Kugler expects some permanency. Governor Waller sees tariffs causing a one-time price rise and believes the Fed should look through it, though this view is not yet widely shared on the Committee. Kashkari said he recognises the debate but personally finds arguments against ignoring tariff-induced inflation more convincing.
Market reaction
It seems the full impact of tariffs may not be felt in inflation figures until the summer in the July and August releases. Price pressures seen then may mean the Fed sits on its hands for longer and prevents officials from cutting rates well into the final quarter of the year. Current US money market pricing implies a Fed rate cut by October at the earliest, with 44bps in total for this year. Of course, a hotter report would spark concerns and could underpin some support for the greenback. The three-year low in the Dollar Index sits at 97.92. To change the long-term downtrend, it looks like prices would need to get above the mid-May high around 102.