Almost all components of the CPI report published on Wednesday met expectations, reflecting acceleration in both overall and core annual inflation. At first glance, this appears to be a significant advantage for the US dollar, but dollar bulls are hesitant to capitalize on it. We will discuss the reasons for such a reaction below, but for now, let's analyze today's release. As soon as the geopolitical agenda takes a back seat, "classical" fundamental factors will remind us of their presence, especially the CPI, one of the key inflation indicators.
According to the published data, the overall consumer price index month-over-month decreased to 0.5%. Notably, this indicator shows a downward trend for the second consecutive month after reaching a peak of 0.9% MoM in March. Year-over-year, the overall CPI demonstrates a contrasting dynamic, surging to 4.2% in May. This is the highest indicator since May 2023. Overall inflation has been accelerating for the third consecutive month (for comparison: in February this year, the overall CPI was at 2.4% YoY).
The core consumer price index, excluding food and energy prices, slowed its growth even more than expected (this is the only component of the report that came in the "red zone"). Instead of the anticipated decrease to 0.3%, the metric fell to 0.2% MoM. Meanwhile, the annual core CPI has been rising actively for the third month in a row, reaching 2.9% in May (the highest level since September last year).
The structure of the report indicates that the main driver of May's growth was, of course, the energy sector, which accounted for over 60% of the total index increase in May. The monthly rise in the overall energy sector was 3.9% (following a 3.8% increase in the previous month), with a year-on-year increase of 23.5%. Specifically, gasoline prices in the US rose by 7.0% in May, while the annual increase reached 40.5%.
However, despite the surge in overall inflation, the core index (Core CPI) shows relatively modest growth on an annual basis. As noted above, in month-over-month terms, it is even slowing. This dynamic is due to several factors. In particular, May saw a decrease in housing services: monthly growth slowed to 0.3%, down from 0.6% the previous month. Annually, Shelter rose by 3.4%. This indicates a gradual cooling of this critical component for the CPI. In the food sector, prices rose by 0.2% MoM (3.1% YoY), with Food-at-Home increasing by only 0.1%, while dining out added 0.3%. The cost of air travel increased by 2.7%, and medical services rose by 0.5%. At the same time, in May, prices declined for used cars (-0.3%) and auto insurance (-1.7%).
What does the May CPI report indicate? First and foremost, it suggests that the current round of price acceleration is largely driven by external factors, primarily the energy component. Meanwhile, the core CPI showed relatively weak growth, suggesting that widespread inflation across most categories of goods has not yet materialized.
It is also worth noting the slowdown in the month-over-month CPI dynamics while the annual figures accelerate. The decrease in the growth rates of the CPI on a monthly basis (both overall and core) indicates a weakening of the current inflation impulse. In other words, prices in May increased at a slower pace than in April, including in sensitive demand categories. This is a sign of gradually easing price pressures. This primarily concerns the core measure: the slowdown to 0.2% MoM, when extrapolated, corresponds to a trajectory lowering to 2.4-2.5% YoY. At the same time, the acceleration of the overall annual CPI is partially explained by a low-base comparison effect.
Overall, the report allows the Federal Reserve to maintain a wait-and-see position without taking additional steps toward policy tightening or even tightening its rhetoric in the near term. This is precisely why EUR/USD traders practically ignored the release. On the one hand, inflation remains high, but on the other hand, its structure is not "tight" enough for the market to start reassessing rate expectations.
In other words, the May CPI report in the US did not bolster the greenback despite the rise in the annual figures. Responding to the report, the EUR/USD pair retreated from intraday highs, albeit by only 20 pips. This indicates that traders "took note of" the report but did not assign it decisive significance. The further price direction will be determined by geopolitical factors, primarily the dynamics of US-Iran negotiations. Until this intrigue is resolved, the pair will likely oscillate within the range of 1.1510–1.1580, where it has been trading for the third consecutive day.
