MNI US Inflation Insight: No Letup In Momentum

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Executive Summary

May’s inflation data presented a slightly mixed but ultimately concerning signal for the Fed. Core CPI was largely in line with expectations, but the broader suite of data - including a robust PPI report and the translation through to yet another uncomfortably high core PCE print - suggests upside pressure continues to bubble under the surface. On balance, the data help cement the FOMC’s likely decision to end its rate easing bias at next week’s meeting alongside substantially upped Q4 PCE projections in the SEP, and will only reinforce speculation over a rate hike by year-end (currently 26bp of 2026 tightening cumulatively priced, same as pre-CPI after some interim volatility).

• A fairly in-line May CPI report all around saw few major deviations across categories vs consensus, with core and supercore both largely in line. Core CPI inflation was very close to expected in May at 0.21% M/M and 2.85% Y/Y.
• The softer sequential CPI details were concentrated in core goods and a reversion in housing. Core goods inflation slipped -0.11% M/M (defying proxy metrics suggesting this category should be heating up), while core CPI’s pullback from April was driven by a pullback in housing inflation following an April distortion.
• That said, recent run rates suggest further upward momentum in core CPI, with the three-month at 3.2% annualized and the six-month rising to 3.1%, while supercore inflation accelerated to 3.6% annualized on a twelve-month rolling basis. In short, still too elevated for comfort and headed in the wrong direction even if May/June are seen by most as the likely peak of pressures.
• Headline CPI remained high at 0.47% M/M and 4.25% Y/Y, with energy still a major contributor and remaining a significant concern for broader inflation impact, even as softer food prices eased some immediate passthrough concerns.
• May’s PPI readings were firmer than expected. On a core basis it was the strongest set of price pressures since 2022, sending a warning signal for pipeline inflation building, including for supercore CPI/PCE.
• The preferred core PPI measure, ex-food/energy/trade, rose 0.8% M/M vs 0.4% expected, the highest print since 2022. Goods categories showed robust inflation, while services PPI was also hot despite the pullback in trade services.
• Core PCE-relevant components of May’s PPI report were on the strong side, led by portfolio management and investment advice. That meant median estimates for May core PCE were upped by analysts, looking now to be landing in the mid-0.3s % M/M after the PPI release, up from 0.26-0.28% after CPI.
• A 0.35% M/M core PCE reading would bring the Y/Y up to 3.4%, with the six-month annualized rate rising to 4.1% and thus reclaiming a 4-handle for the first time since mid-2023.