“I love the inflation” - Trump
The May US Consumer Price Index (CPI) report showed headline inflation rising to 4.2%yoy, marking the first time inflation has exceeded 4% in three years. Much of the increase was driven by higher energy prices following supply disruptions linked to the US-Iran conflict. Core CPI, which excludes food and energy, remained more subdued at 2.9%.
Markets took the data largely in their stride, as the figures were broadly in line with expectations. Equities held firm and Treasury yields were stable, with investors encouraged that underlying inflation pressures did not accelerate more sharply. As a result, expectations remain that the Fed will maintain a holding pattern at its upcoming FOMC meeting.
Beneath the headline figures, however, some components warrant closer attention. The medical care index rose 0.3% during the month, while hospital services increased 0.7%. On an annual basis, medical care inflation now stands at 2.6% and appears to be regaining momentum after a period of relative stability.
This matters because healthcare services carry a larger weighting in the Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation, than they do in CPI. Unlike CPI, PCE incorporates spending made on consumers’ behalf, such as Medicare and employer-sponsored health insurance. As a result, even modest increases in healthcare costs can have a more meaningful impact on future PCE readings.
With the Fed now in its blackout period, markets have entered a temporary information vacuum. That leaves next week’s FOMC statement, economic projections and new Chair Kevin Warsh’s press conference carrying outsized significance. With rates expected to remain on hold, the messaging will matter more than the decision itself, particularly as investors weigh whether persistent services inflation could delay the path to policy easing later in the year.
If you would like to receive The Daily Update to your inbox, please email markets@epicip.com or click the link below.