Views on US CPI: Moderate inflation as growth slowdown looms by Julian Schaerer, Economist, Julius Baer
Below the Views on US CPI: Moderate inflation as growth slowdown looms by Julian Schaerer, Economist, Julius Baer
US inflation in May remains moderate, and further easing of inflation pressure is required for the Fed to end its summer pause. US tariff policy still bears the risk of inflation volatility. We stick to our baseline scenario, expecting the Fed to remove its restrictive policy rapidly once economic growth slows.
US consumer price inflation surprised modestly on the downside in May. Annual inflation eased to 2.4% (consensus 2.5%), while core inflation slowed to 2.8% (consensus 2.9%). On a monthly basis, prices rose just 0.1%, due to falling energy costs. Recent trends suggest that underlying price pressures are gradually subsiding, leading to a slow but steady easing of core inflation towards the Fed’s long-term target of 2%. Markets reacted with little change to expectations of policy easing by the Fed, as the data did not significantly alter the outlook for monetary policy.
At this stage, an inflationary impact of Trump’s recently announced tariffs is hardly visible, with goods inflation still subdued and services inflation broadly steady. Moreover, the latest data releases indicate that the pass-through effects of tariffs on consumer prices remained muted and that upside inflation risks seem less severe than anticipated. As services price inflation is likely to slow over the summer, the upside from goods price inflation may be offset to a large degree. While inflation approaches the Fed’s 2% target, the labour market is also showing first signs of weakness, and further fading of economic momentum is on the horizon.
Therefore, the Fed’s policymaking may later this year start to shift from a balanced, data-dependent outlook to the removal of its restrictive stance. We expect the Fed to stay on hold at this week’s meeting, maintaining a cautious ‘wait-and-see’ approach. Given that pressure from President Trump against high interest rates remains ample, the Fed will likely prefer to trim rates rapidly to a more neutral stance once incoming data allows it to do so. Considering these economic and political dynamics, our view remains that the Fed will respond forcefully in September and October with two sizeable 50bps cuts, which is more aggressive than what is currently priced in by markets.
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