US inflation data has once again surpassed expectations.
US inflation data has once again surpassed expectations.
US inflation data has once again surpassed expectations, dashing hopes for a Federal Reserve interest rate cut in June. The latest figures reveal a 0.4% month-on-month increase in core consumer price inflation for the third consecutive month, doubling the rate necessary to bring inflation down to the target of 2% year-on-year. This development solidifies the “higher for longer” narrative on interest rates, with September emerging as the earliest opportunity for any policy easing.
Analysts had anticipated a more modest 0.3% increase in core CPI, making the actual outcome a significant upside surprise. Prior to the release, markets had priced in a 15 basis point rate cut, but this expectation has now plummeted to just 5.5 basis points. To justify a rate cut in June, a considerable slowdown in payrolls growth and lower core CPI prints would be necessary, conditions that currently seem unlikely given the recent data.
Core CPI MoM%, 3M annualised and YoY% changes. Source: Macrobond, ING
The robustness in inflation was primarily driven by increases in super core services, particularly medical care, and transport services. Notably, maintenance and vehicle insurance costs witnessed substantial upticks, contributing to the overall inflationary pressure. Additionally, the cost of shelter and energy also rose, further adding to headline inflation.
Despite some pockets of relief, such as declining prices in vehicle markets and recreation, the overall inflationary pressure remains persistent. Consequently, the prospect of a rate cut in June appears off the table unless there is a rapid turnaround in economic conditions. With July also uncertain, September emerges as the more probable start point for any potential easing measures by the Federal Reserve, potentially limiting the central bank to a maximum of three rate cuts this year.
The latest inflation data underscores the challenges faced by policymakers in navigating the delicate balance between supporting economic growth and controlling inflationary pressures. As markets adjust their expectations, investors will closely monitor future economic indicators for insights into the Federal Reserve’s future policy trajectory.
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