US CPI: Another downward surprise for core inflation - Natixis

US total CPI declined by 0.1% MoM in May (slightly below expectations) due to lower oil prices and another modest increase in core prices (+0.1% MoM versus +0.2% expected) notes Thomas Julien, Research Analyst at Natixis.

Key Quotes

“This time, core prices were held back by a steeper decline in the price of goods while the price of shelter also decelerated. All in all, inflation lost 0.3pts to settle at 1.9% while core inflation lost 0.2pts to 1.7%. Looking forward, with lower oil prices expectations in our central scenario we have revised downward our inflation forecasts in 2017 (from 2.7% to 2.5%). Yet we still expect core inflation to gain momentum as labor market tightens and downward pressures on the price of goods alleviate. As for the Fed, the recent trend in core inflation may prompt J. Yellen to adopt a cautious message this afternoon.” 

“Consumer prices decreased by 0.1% MoM in May, below consensus expectations (0.0% MoM) but in line with ours (-0.1% MoM). As expected, energy prices declined (-2.7%), food prices rose by 0.2% but core prices rose less than expected: +0.1% versus +0.2% for consensus expectations.”

“The downward surprise on core prices can be explained by a steeper decline in the price of goods and slight deceleration in the shelter component. All in all, total inflation lost 0.3pts to 1.9% in May while core inflation lost 0.2pts to 1.7%.”

“For the Fed it means that for the moment there is no trade-off between inflation and full employment. We expect Chair Yellen’s comments of this afternoon to clarify how the Fed intends to operate in this environment.”

“Looking forward, since we are now expecting lower oil prices and given the recent trend in core inflation, we have revised downward our inflation forecasts from 2.7% to 2.5% in 2017. That being said, we still expect core inflation to gain momentum on our forecast horizon as labor market tightens and downward pressures on the price of goods alleviate.”