Quick Bites | US inflation looks to be under control

Quick Bite – US inflation looks to be under control

The latest readout of the US consumer price index, with a headline rise of 2.3%, was indeed comfortingly dull. It’s a case of “No bad news is good news”. In April, when import tariffs briefly hit their highest rates in more than a century, steady disinflation continued as though nothing had happened. This was the third month in succession that inflation declined and came in below expectations.

It is likely that US companies boosted their inventories before the tariffs became effective to save them from having to pass on price rises to customers. Maybe the pain is still to come and it’s too early to see tariff-induced inflation. Meanwhile, services continue to be the greatest obstacle to lowering overall inflation to the Federal Reserve’s targets, even though it’s coming down only very slowly. Falling fuel prices improved the picture.

Source: Bloomberg

The so-called “supercore” measure of services excluding shelter prices, emphasized by Fed Chair Jerome Powell, is down to 2.7%, its lowest since 2021, while prices that tend to be sticky are falling. The same is true of the trimmed mean, which excludes the greatest outliers in either direction, and takes the average of the rest:

Source: Bloomberg

All of this would normally boost hopes for Fed rate cuts, as lower inflation allows the central bank to offer cheaper money. The problem is that the CPI data is balanced by growing optimism that a recession can be avoided, which means less urgency to ease. Goldman Sachs and others have lowered their probability of a recession (from 45% to 35%) in the wake of the CPI data.

How did markets respond to the US inflation data? As you would expect: with less pressure on the Fed to keep a tight rein on the US economy, we see Treasury yields up, the USD down, and oil up.

Source: WSJ

Source: WSJ

Source: WSJ