Consumer Price Index (CPI) data for the month of May are set to indicate the fastest growing inflation across the US this century. Economists expect the Consumer Price Index (CPI) for May to come in up 2.5% year-on-year. This represents a much more robust overall rate than we’d previously observed in April’s numbers. Finally, the monthly CPI is expected to increase by 0.2%, indicating a slow creep back up of price levels.
For May, analysts are looking for the core CPI to increase. This core measure, which excludes the especially volatile food and energy sectors, should be up a year-over-year 2.9%. This number marks a modest increase from the 2.8% growth seen last month. The annual core CPI inflation is the big one. Economists pay attention to it, and central banks try to keep it in check so that inflation stays low and stable, typically at about 2% per year.
Implications of Core CPI on Economic Policies
The core CPI is key in the formulation of monetary policy as it is a better indication of the overall direction of inflation. When core inflation crosses over that 2% ceiling, it is central bank practice to tighten monetary policy. They plan to raise interest rates to combat rising inflation. On the flip side, if core inflation is below this threshold, it would result in a more dovish monetary policy.
The Federal Reserve’s recent decision to maintain the federal funds rate between 4.25% and 4.50% during its May policy meeting was influenced by prevailing inflationary pressures. In the weeks ahead, incoming data has the potential to be a big driver of the Fed’s policy outlook and the US Dollar’s performance as a result.
“I see greater upside risks to inflation and potential downside risks to employment and output growth.” – Adriana Kugler
Given these dynamics, all eyes will be on May’s inflation figures from here. These folks all want to know whether President Donald Trump’s new tariff regime is making inflation worse. Many analysts are predicting an upside surprise in the monthly core CPI. This would almost immediately make the US Dollar much firmer, most notably against the Euro.
Market Reactions and Expectations
The Consumer Price Index (CPI) indexes both MoM and year-on-year (YoY) percentage changes. This all combines to make it one of the most watched and anticipated indicators by market players themselves. Any upside surprise in the core CPI reading would likely provide a major lift to the USD in the short term. This could see increased pressure on the EUR/USD pairings. If the monthly CPI reading falls below 0.2%, it could alleviate concerns about persistent inflationary pressures due to tariffs.
Market analysts have been warning to take a real long look at the report’s finer points. This level of scrutiny will be tremendously important in determining the impact of tariffs on underlying inflation.
“Core CPI inflation likely stayed unchanged in May, posting a 0.23% m/m increase. We expect still soft travel services prices to keep the series under control, as signs of tariffs pass-through start to emerge.” – Analysts at TD Securities
Analysts at TD Securities are predicting a further slowdown in headline CPI inflation. This deceleration will be mostly due to a big decline in gas prices. They project headline and core CPI inflation to come in at 2.4% and 2.9% YoY, respectively.
The Broader Economic Context
While that’s a positive development, it’s important to understand the bigger economic picture before declaring what these inflation numbers mean. The current debate on tariffs and their likely effect on domestic prices remains the focus of the nation’s economic forecasters. Believe me, investors know that key inflation data moves the market one way or the other, often dramatically changing expectations on what the Fed will do next.
With rising inflation expectations, any adjustments in the Fed’s policy could have profound implications for various sectors of the economy. For example, the impact of higher interest rates might weaken consumer spending and borrowing, which would be disinflationary and could slow economic growth.
Stakeholders will be hanging on the announcement of May’s CPI to see whether a triple trigger still applies here. The market is primed for volatility given the potential ramifications of this important economic bellwether.