The US Consumer Price Index grew by 3.3% in the year to May, coming in lower than the 3.4% growth expectations.
The data comes as markets search for signs of an interest rate cut by the Federal Reserve. In previous Fed announcements, chair Jerome Powell has stated that rate cuts would not be considered until the US was moving “sustainably” towards its 2% inflation goal.
The next rate cut decision by the Fed will be made 12 June, however markets are pencilling in a first possible cut for September.
Charlotte Daughtrey, equity investment specialist at Federated Hermes, said: “US inflation has proven sticker than anticipated so far in 2024, so today’s print will be welcomed by the market.
“That said, it may be premature to extrapolate this single data point and we would expect the Fed to continue to exert caution, with the prospect of limited rate cuts over the remainder of this year. Ongoing data will continue to be scrutinised as the underlying economic picture emerges.”
In April, US CPI inflation came in at 3.4%, down from 3.5% in March
Peter Graf, chief investment officer at Nikko Asset Management Americas, added: “The downside surprise to price growth is a fly in the ointment for FOMC members, shaking their resolve to signal slower rate cuts in today’s dot plot of interest rate predictions.
“Markets will flip back to pricing two or more cuts for 2024, but repeated flip-flopping of expectations has weakened their sway on stocks. Investors will start to think about the demand implications of slower price growth, questioning whether last week’s employment data was more of an anomaly than a harbinger of continued robust consumption. This puts the onus of supporting earnings growth even more squarely on large-cap tech and their heroic AI investments.”
By sector, food prices grew 2.1% year-on-year while energy grew 3.7%. However, commodities without food and energy dropped 1.7%.
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Ronald Temple, chief market strategist at Lazard, said: “A September rate cut is very much back in play, as May’s core inflation was only 16 basis points month-on-month, which is less than half of the first quarter run-rate. Importantly, there were no major anomalies that skewed the results positively.
“This report is exactly what the Fed needed to increase its confidence that inflation is subsiding and rate cuts are warranted in the months ahead.”
While analysts believe the reading has put the Fed in a more flexible position, Ashwin Alankar, head of global asset allocation and portfolio manager at Janus Henderson, said there is still “no greater goal than keeping inflation expectations anchored, economic activity robust, and financial markets friendly”.
“Until greater evidence of dis-inflation is seen, both in breadth and depth, today’s softness is supportive of a pre-emptive cut, rather than a pivot in Fed policy towards accommodation,” he added.
