U.S. CPI Hits Three-Year High, Wall Street Unfazed—"New Fed Mouthpiece": This Report Solved Nothing
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U.S. May CPI heats up again, year-on-year growth reaches a three-year high, but Wall Street’s conclusion is surprisingly unanimous: this report neither fundamentally changes the Fed’s policy path nor provides clear direction for the market.
Nick Timiraos, a reporter known as the “new Fed newsletter,” commented that for the Fed, “the May inflation report solves nothing.” Although core inflation figures were below expectations, energy shocks, AI-driven demand expansion, and still strong economic growth leave the inflation outlook full of uncertainties.
Meanwhile, several Wall Street institutions believe that while this CPI reinforces the logic of “higher rates for longer,” it is not enough to trigger a rate hike. Market bets on renewed Fed rate hikes have risen, but mainstream institutions still tend to believe the Fed will remain on hold for the next few months.
May CPI rise matches expectations; core CPI month-on-month rise below expectations
The U.S. Bureau of Labor Statistics (BLS) released data Wednesday:
- May CPI rose 4.2% year-on-year, higher than April’s 3.8%, the highest level since April 2023;
- May CPI rose 0.5% month-on-month, below April’s 0.6%, and both month-on-month increases were in line with market expectations;
- Core CPI, excluding food and energy, rose 0.2% month-on-month, below the market expected 0.3% increase;
- Core CPI rose 2.9% year-on-year, slightly faster than April’s 2.8%, in line with market expectations.
Structurally, this round of inflation rebound was almost entirely dominated by energy prices.
Due to ongoing Iran conflict and disruptions in Hormuz Strait transport, energy prices rose 3.9% month-on-month in May, contributing over 60% of the total inflation increase that month. Gasoline prices rose over 40% year-on-year, and airline tickets rose 26.7% year-on-year.
On the other hand, many core items remained moderate: food price increases were limited; new vehicle prices fell; medical insurance prices declined; transportation services prices retreated.
This combination of hot headline CPI and moderate core CPI has led to divergence in market views on future policy direction.
“New Fed Newsletter”: Surging energy costs weaken the weight of moderate core CPI
Wall Street believes the greatest significance of this CPI is not in the numbers themselves, but in revealing the policy dilemma the Fed now faces.
Timiraos commented that the most important point from the May CPI report is: “Fed officials cannot reach any definite conclusions based solely on this single data point.”
He points out that the core CPI, excluding volatile food and energy, rose only 0.21% month-on-month, indeed lower than forecast, but that is not enough for the Fed to be confident inflation is back under control. On the contrary, energy price increases led overall inflation's annualized rate for the past three months to exceed 8%, while the AI investment craze, wealth effects from the stock market, and robust demand are enabling companies to keep passing costs to consumers.
He believes that for the Fed under the new Chair Walsh,
“Such a moderate monthly data point is no longer as significant as before: it is overshadowed by strong overall inflation driven by booming energy costs. Now, reasons for patience rely not on a single report, but on a series of cooling inflation readings.”
In other words, this report is neither enough to support rate cuts nor enough to immediately prompt rate hikes. Therefore, “wait and see” remains the most rational policy choice.
Timiraos writes that the May CPI report means, as the first monetary policy meeting with Chair Walsh approaches next week,
“The Fed’s recent shift toward a hawkish stance remains unchanged. For rate setters, the issue is no longer how one month’s data performs, but whether their anticipated inflation moderation (or easing upward price pressure) will materialize—and if not, how they should respond.
Discussion now ranges widely, from holding rates steady for much longer, to reconsidering the possibility of hikes. Such debate was unimaginable at the start of the year, as the market then broadly expected rate cuts.”
Wall Street’s View: Rate hike alarm not yet sounded
Most institutions believe this CPI reinforces expectations of “higher rates for longer,” but is still some way from truly restarting the rate hike cycle.
- Fitch: Rate hike alarm not sounded yet
Olu Sonola, Chief US Economist at Fitch Ratings, said, “The overall inflation is indeed very hot and still heating up, but this isn’t a story where panicky rate hikes are required.”
He believes core inflation remains relatively contained, giving the Fed space to stand pat. What will truly decide the policy direction are core inflation and inflation expectations in the coming months.
- Principal: Core data gives Fed breathing room
Seema Shah, Chief Global Strategist at Principal Asset Management, noted that while above 4% headline inflation is concerning, energy is the main driver and housing inflation is easing, and there is no evidence yet of widespread “second-round effects.” Thus, the Fed still has reason to be patient.
She also pointed out that the market may be overpricing the prospect of further rate hikes.
- Oxford Economics: Market too hawkish
John Canavan, Chief US Analyst at Oxford Economics, is more optimistic.
He argues that market fears of rate hike risk are somewhat overdone. Once Hormuz Strait shipping normalizes and energy price pressure shrinks, rate hike expectations will recede significantly.
- Bloomberg Economics: Core inflation still aligns with 2% target trajectory
Anna Wong and Troy Durie, economists at Bloomberg Economics, point out that May core CPI was even below their already moderate forecast. Annualizing recent months, core inflation growth still broadly matches the Fed’s 2% target.
They believe that the breadth of price increases is narrowing, suggesting inflation may have peaked. Consumers’ signs of cutting discretionary spending are increasingly evident, and companies’ pricing power is weakening.
Market Impact: Rate cut expectations continue to be postponed, but a hike is not the baseline scenario
Market reaction to the data was relatively restrained.
After the CPI release, US stocks edged lower, Treasury yields changed little, and the dollar index only fluctuated slightly. According to Reuters, since the data basically met expectations, it did not trigger widespread repricing.
However, this CPI further solidified the expectation of “higher interest rates for longer” in the market.
After strong non-farm payroll data previously released, the market had already sharply reduced bets on rate cuts this year. This inflation print further reinforces the trend.
The mainstream Wall Street expectation is:
- Rate cuts in June and July are basically off the table;
- The Fed will most likely keep rates unchanged for the next few months;
- If energy prices remain elevated and pass through to core categories, debate about rate hikes will heat up;
- If core inflation remains around 0.2% monthly, rate cuts could still be possible later this year.
For Wall Street, the main takeaway from this CPI is not “runaway inflation,” but rather that the US economy has again entered a familiar yet tricky phase—headline inflation is clearly high, while core inflation hasn’t worsened in step. As Timiraos says, this makes it hard for the Fed to turn dovish easily, yet lacking sufficient reasons to tighten policy immediately. Next, what will decide the market’s direction will not be a single month’s CPI, but whether the energy shock evolves into broader, more prolonged inflation pressure.
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