US: Softer consumer price inflation data – ING

James Knightley, chief international economist at ING, notes that the US headline inflation rose 0.1% month-on-month in May, leaving the annual rate of CPI at 1.8% year-on-year, down from 1.9% in April.

Key Quotes

“Core inflation was softer though, undershooting the consensus 0.2% MoM prediction by a tenth of a percentage point. This leaves the annual rate of core inflation at 2%, which is the slowest rate since February 2018.”

“For now, inflation pressures in aggregate remain benign. As such, financial markets will see little reason for the Federal Reserve to hold back from rate cuts in coming months to combat the perceived threat of a slowdown caused by intensifying trade tensions.”

“Given the recent language shift from Fed officials, we believe that they will use next week’s June FOMC to signal an easing bias. This would perhaps be through repeating Fed Chair Jerome’s Powell use of the “closely monitoring” phrase and downward revisions to the economic projections and the “dot” diagram, which currently has a rate hike priced in for 2020.”

“While we doubt that the Fed will carry through with the 100 basis points or so of policy easing currently priced by markets, the longer trade tensions drag on, the greater the chance the Fed will be forced to respond aggressively.”