AWARDS
Credit Agricole: US May CPI
The US Consumer Price Index (CPI) rose 4.25% year-over-year in May, slightly below our forecast (4.30%) but slightly above the Bloomberg consensus average (4.21%). The day before publication, the market expected a 4.27% increase.
Core inflation came in at 0.21% month-over-month in South Africa, 4 basis points above our below-consensus forecast of 0.17% but 6 basis points below the Bloomberg consensus average of 0.27%. Taking this into account, annualized three-month annualized core inflation remained virtually unchanged at 3.17% in May, compared to 3.20% in April.
Within the core economy, consumer goods showed a general downward trend, with little evidence of a significant pass-through of the surge in energy prices, while services prices were slightly firmer, with house and rent prices exceeding our expectations (although down from last month's effectively "doubling" monthly reading due to the BLS's handling of the shutdown).
Overall, however, the key takeaway is that the core index surprised to the downside, in line with our forecast. Services have undoubtedly proven more resilient, but consumer staples are still showing no tangible signs of energy price pass-through, resulting in a relatively subdued core reading this month.
Looking ahead, we will of course refine our forecasts as usual, but for now, we believe May will likely mark the peak of the annualized Consumer Price Index (CPI), and we remain confident that core inflation will remain in a range of around 2.7% to 3.0% for the rest of the year.
Regarding Personal Consumption Expenditures (PCE), we will have to wait for the May PPI report to set final expectations, although it is important to note that neither the increase in the Health Services CPI (0.5% MoM) nor the increase in airfares (2.7% MoM) will impact PCE, as these data are derived from the CPI. Another positive for the PCE is that the computer software and accessories sector, which has a much larger weight in the PCE than in the CPI and therefore plays a more significant role in the former, slowed sharply, reaching 0.0% month-over-month, following consecutive increases of 4.0% month-over-month in March and 5.0% month-over-month in April.
Regarding the Fed, we don't think the report is bad overall. While the continued rise in headline inflation is obviously not ideal and represents an undesirable development that the Fed will not ignore, we remain of the view that core inflation may prove to be the most important indicator. Given that this indicator is relatively muted on a monthly basis, offering little evidence of second-order effects other than further increases in airfares, we believe most of the FOMC will prefer to hold steady for now.
