US CPI Banks Preview: Headline inflation is moderating, but underlying persists

We expect the May CPI, released just ahead of the FOMC meeting, to slow down to 0.2% MoM (4.2% YoY) driven by negative contribution from energy prices. We also forecast Core CPI to continue cooling to 0.3% MoM (5.2% YoY). 

Across all goods and services, consumer prices are likely to have risen by only 0.1% in May compared to April. The YoY rate would then fall significantly from 4.9% to 4.1%. However, one should not conclude from this that the inflation problem is gradually disappearing. We expect the core rate, which excludes volatile energy and food prices and better reflects the underlying trend, to be high again. We forecast a core rate of 0.4% in MoM terms, which would be roughly in line with the increase in recent months. A clear easing of inflationary pressure is therefore still not in sight for this important indicator.

We expect core CPI inflation to rise by 0.4% MoM and headline CPI by 0.3% in May.

Core prices likely stayed firm in May, with the index rising a strong 0.4% MoM for a second straight month, also matching the MoM avg since June 2022. Goods inflation likely stayed positive, with shelter prices remaining the key wildcard (expect slowing). Retreating gas prices (-6% MoM) will drag non-core inflation. Our MoM forecasts imply 4.0%/5.3% YoY for total/core prices.

We expect YoY growth in the US CPI to slow substantially to 4.1% in May from 4.9% in April. Gas prices were 20% below year-ago levels in May. Oil prices are down after surging in the wake of Russia’s invasion of Ukraine. And soaring food inflation has cooled in recent months with back-to-back MoM declines in grocery prices over March and April. 

The energy component may have had a negative impact on the headline index as prices likely fell in both the gasoline and natural gas segments. Expected gains for shelter could still result in a 0.2% monthly increase in headline prices. If we’re right, the YoY rate should come down from 4.9% to a 2-year low of 4.1%. The core index, meanwhile, could have advanced 0.3% on a monthly basis, something which would translate into a 5.1% annual gain.

We expect a wafer-thin +0.01% MoM advance for headline CPI (vs. +0.37% previously) and a +0.37% increase for core (vs. +0.41%). This would lead the former to drop by about a full percentage point to 4.0% YoY, with the latter down -0.2% to 5.3%, with the 3, 6 and 12-month core readings all still struggling to gain much downward momentum below 5% at the moment.

With prices at the pump averaging lower over the month, the total CPI was likely limited to a 0.1% increase in May, masking a hotter advance in categories outside of energy and food. Indeed, core CPI prices could have risen by 0.4%, extending April’s momentum, in line with continued strength in the labor market that will have worked to support demand, implying an acceleration in the Fed’s preferred sub-category of services ex. housing. The risks to the core figure could be slightly to the downside, as the rent measures could have resumed their deceleration following a temporary pause in April, and used car prices could have declined following a sharp increase in April. Moreover, the ISM services prices paid measure also fell in May. 

Overall consumer price inflation likely moderated in May. We forecast the headline CPI was flat during the month, as gasoline prices fell and food prices appeared to hold steady. Core inflation, on the other hand, likely remained firm. Auction data suggest used vehicle prices rose again last month, and we look for ongoing strength in core services. Specifically, we suspect the core CPI rose 0.4% for the third consecutive month, which would leave the YoY change little improved at 5.3% in May. 

We expect core CPI inflation to decline to 0.3% MoM in May, a welcome step lower after five consecutive months of registering 0.4% MoM. The YoY reading is likely to decline to 5.2%. Headline inflation is likely to decline to 0.1% MoM.