- Driven by the surge in energy prices due to the Middle East conflict, the U.S. Consumer Price Index (CPI) for May is expected to rise by 0.5% month-on-month, with a year-on-year increase potentially reaching 4.2%, the highest level since April 2023. This provides stronger macroeconomic data support for the Federal Reserve (Fed) to maintain its current high interest rate policy unchanged this year.
- With gasoline prices rising by an average of 8.8% nationwide in May to $4.60 per gallon, the inflation rate may outpace wage growth for the second consecutive month. This not only continues to erode real household income but may also impose a temporary constraint on overall consumer spending in the second half of the year.
- Excluding food and energy, the core Consumer Price Index is expected to rise by 2.9% year-on-year, with the month-on-month increase slightly slowing to 0.3% due to the fading base effect caused by the government shutdown. The strong resilience of the labor market has led the market to raise its assessment of the Fed's threshold for tightening monetary policy.
Energy Prices Elevate Overall Inflation Pressure
According to a Reuters survey, the U.S. overall Consumer Price Index (CPI) for May is expected to climb to a year-on-year increase of 4.2%, significantly higher than April's 3.8% and March's 3.3%. The core variable driving this round of overall inflation is the systemic impact on the energy supply chain. Data from the U.S. Energy Information Administration (EIA) shows that due to the escalation of geopolitical conflicts since the end of February, the national average gasoline price recorded an 8.8% increase in May alone, having previously surged over 50% from its low point. Although recent partial ceasefire agreements have led to some retreat in international oil prices, prompting some economists to predict that May might be the peak of this inflation cycle, the profound impact of geopolitical risks on the supply chain has not been completely eliminated.
Core Inflation Path and Service Sector Transmission
Excluding the more volatile food and energy components, the core CPI for May is expected to slightly rise to a year-on-year increase of 2.9% from April's 2.8%, while the month-on-month increase is expected to fall from 0.4% to 0.3%. The slowdown in the month-on-month growth of core inflation is partly due to the gradual fading of the one-time adjustment effect of rental indicators caused by data collection delays. Additionally, the decline in used car and truck prices has also exerted some downward pressure on goods inflation. The market is currently highly focused on whether energy costs will be transmitted to a broader range of service categories. If there are clear signs of transmission in core inflation, expectations for the Fed to resume rate hikes may be reactivated.
Labor Market Resilience Delays Policy Shift
The U.S. macroeconomic fundamentals remain quite resilient. Non-farm employment in May exceeded market expectations for the third consecutive month, while the unemployment rate remained stable at 4.3%. This tight labor market condition provides some structural support for prices. Although financial markets have already started pricing in some tightening policies, most economists believe that the threshold for the Fed to adopt further aggressive monetary tightening policies remains high in the current high-interest-rate environment. With all inflation indicators significantly above the 2% official target, the overall tone of maintaining a tight monetary policy stance is unlikely to undergo a fundamental change in the short term.
End of Tariff Effects and Consumer Pressure
On the micro level of goods inflation, Morgan Stanley's analysis indicates that the U.S. economy is currently at the end stage of the tariff transmission effect. Model calculations show that tariff factors have cumulatively pushed up prices by about 63 basis points, approaching the total estimated transmission range of 70 basis points, with the slowdown trend expected to continue in the second half of the year. However, the macro reality of inflation consistently outpacing wage growth is exerting substantial pressure on the balance sheets of the household sector. As more consumers begin to dip into savings to meet daily expenses, if the actual income level of households continues to shrink, macroeconomic aggregate demand will face systemic slowdown pressure in the second half of this year.
