Markets

US Core Inflation Cools, Bolstering Case for Fed Rate Cut

By Katia Dmitrieva

A closely watched measure of US inflation trailed forecasts in May as prices fell for used vehicles, reinforcing the case among investors for the Federal Reserve to cut interest rates.

The core consumer price index, which removes energy and food costs, rose 2 per cent from a year earlier, below forecasts, according to a Labor Department report Wednesday. The figure rose 0.1 per cent from the prior month for a fourth-straight time and missed estimates. The broader CPI increased an annual 1.8 per cent, less than projected.

Cooling Prices
US stock futures briefly advanced and Treasury yields dipped as below-forecast inflation followed signs of slower economic growth that stands to bolster investor expectations for Fed rate cuts this year. Weighing even heavier are signs of lackluster expansions at home and abroad, along with President Donald Trumps tariffs on Chinese goods.

The market-implied odds of a July cut increased after the report, with Fed funds futures now indicating almost a quarter-point of easing in the next two months.

Lower gasoline prices played a role in keeping broader inflation tame. Energy prices fell 0.6 per cent from the prior month and 0.5 per cent from a year earlier as all major components in the category fell on an annual basis.

Apparel prices were unchanged after two steep declines. Readings have trended lower after the Commerce Department changed its data collection methodology.

Fed Target
At the same time, inflation is showing signs of firming by another measure that the Fed prefers. That core price gauge — linked to spending and excluding food and energy — firmed in April for the first time this year, though remained below the Feds 2 per cent target. It tends to run slightly below the Labor Departments CPI.

Powell, in a speech last week, opened the door to interest-rate cuts after holding in May that below-target inflation was due to transitory factors. Bond-market investors expect the central bank to lower rates as it tries to brace the economy for slowing global growth, lower corporate spending and a weaker consumer outlook.

Trump has maintained public pressure on the Fed to cut interest rates, lamenting Monday that he didnt have China-style control over monetary policy. Fed officials will next meet June 18-19.

While Trump raised tariffs on some Chinese goods early in May, the impact wouldnt apply broadly until imports reach their final destRead More – Source
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