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US Inflation Data in Focus After Disappointing NFP

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The US Department of Commerce will be releasing the monthly inflation report today. Following last Friday’s weak jobs report, focus turns to the consumer price index data.

Investors will likely assess the pace of growth in inflation as the Federal Reserve meets in a week’s time for its monetary policy.

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Following Friday’s disappointing jobs report, the prospects for a rate cut this year has dramatically increased. This was further alleviated by the fact that in a recent speaking engagement, Fed Chair Powell signaled that they could cut rates.

The primary basis for this view was, of course, the rising trade tensions with China and now Mexico. But inflation growth has plagued Fed officials. The bank had previously signaled that it would allow inflation to overshoot the 2% inflation target rate. This was decided due to the prolonged weak patch of consumer price gains.

However, even this looks unlikely.

Consumer Prices Forecast to Rise by Just 0.1%

Data for the month of May is forecast to show a consumer prices increase of just 0.1% on the month in May. This marks a slower pace of increase following the 0.2% rise in the April CPI.

On a year over year basis, headline inflation is forecast to slow to a pace of 1.9% in May. This follows a 2.0% increase in the month before.

U.S. Consumer Price Index
U.S. Consumer Price Index Change

The core inflation rate which excludes the volatile food and energy prices is forecast to rise 0.2% on the month, slightly accelerating from the 0.1% increase previously. On a year over year basis, core CPI is forecast to rise 2.1%, maintaining the same level of gains from before.

Looking back, the price gains in consumer prices were driven mostly by higher energy prices. But this support from higher fuel costs is likely to fade. The sharp decline in energy prices could potentially remove that support, especially on the core inflation rate.

Market watchers speculate that the hike in tariffs from goods imported from China could potentially see firms passing on the costs to consumers. While the effect of the higher tariffs could impact inflation, the influence is said to be only negligible.

Recent trends in inflation elsewhere show that following the price surge in April due to the Easter holidays, consumer prices pulled back sharply. A similar theme could be seen in the inflation report for today as well.

Impact of Weaker Inflation on Monetary Policy

With the inflation data coming out today, investors will be assessing the impact on the Fed meeting next week. Although the probability of a June rate cut rose to around 27% by last Friday’s close, the chances of a rate cut are slim.

The Fed is likely to wait and watch for the headwinds to settle. This could mean that the Fed will most likely take action either at the September or December FOMC meeting. A cut in interest rates would see a move back to dovish Fed policy.

This was evident from the recent market behavior. While the equity markets fell initially due to the trade uncertainties, the major US indices picked up following a weak patch of economic data.

The gains come as investors start pricing in a rate cut from the Fed.

Fuel prices will also play a major role in consumer prices in the coming months. Oil prices have dropped from the peak near the $65 handle to trade below the $55 level. OPEC members will be meeting later in June for their semi-annual meeting.

President Trump has been calling for OPEC to raise production to lower oil prices. However, much is left to be seen. Further weakening in oil prices could potentially dampen any prospects of underlying price pressures.

The inflation data today will be followed by the retail sales report coming out during the week. Overall, the economic data this week will no doubt see some kind of influence in the Fed’s meeting.

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