Surprise Dip In May Inflation Raises Hopes For Pause In Fed Rate Hikes

Inflation decelerated more than expected in May, bolstering investor optimism regarding the conclusion of Fed rate hikes.

The U.S. consumer price index (CPI) rose 4% year-on-year in May, down from 4.9% in April, according to figures released by the Bureau of Labor Statistics on Tuesday. The much-awaited inflation report came in slightly below the 4.1% average economist expectation and marks the lowest inflation reading since March 2021.

Inflation Falls In May: What You Need To Know

• The annual CPI inflation rate was 4% last month, falling from the 4.9% recorded in April and coming in below the 4.1% predicted by analysts.
• On a monthly basis, the CPI increased by 0.1% in May, slowing from a 0.4% increase in April. The figure was below the 0.2% forecasted by economists.
• Falling energy prices continued to drive down overall inflation in May. The energy index declined 3.6% in May and is down 11.7% compared to a year ago.
• Food prices ticked 0.2% higher on a monthly basis, and were 6.7% higher than a year ago. 
• Core inflation, which excludes volatile food and energy goods from the CPI basket, increased 5.3% year-on-year, down from April’s 5.6% reading but slightly above the 5.2% expected.
• The monthly core inflation print was 0.4%, which was in line with both April’s figure and the consensus 0.4% estimate.
• Services items continue to contribute to overall CPI inflation, with shelter rising 0.4% on the month and 8% year-on-year. 
• The inflation report is expected to bolster the case for a pause in the Fed’s tightening cycle on Wednesday.

Read also: US Stocks Poised For Gains Ahead Of Inflation Data: Analyst Says AI-Driven Rally Masks Cautious Undertone

Prior to the May CPI report, the market was highly skewed toward the Fed holding rates steady in June, with the CME Group FedWatch tool assigning an 81% chance of this event. After the CPI release, investor bets on a Fed rate pause in June rose to 96.4%.

Market Reactions: Stocks And Gold Rise, Dollar Tumbles

The dollar, as closely tracked by the Invesco DB USD Index Bullish Fund ETF UUP, fell substantially by 0.5% in the minutes following the May CPI data.

S&P 500 futures jumped 0.3%, as investors reaffirmed their conviction the Fed will hold interest rates unchanged. The SPDR S&P 500 ETF Trust SPY tracks the S&P 500 index.

Gold, closely tracked by the SPDR Gold Trust ETF GLD, rose 0.4%.

Treasury yields sharply dropped, with the 10-year yield down 5 basis points to 3.69% and the two-year yield down 7 basis points to 4.51%.

Chart: Market Reactions To May CPI Report