- In May, the U.S. unadjusted Consumer Price Index (CPI) year-on-year growth was recorded at 4.17%, meeting market expectations. Energy prices rose by 3.9% month-on-month, contributing over 60% of the increase, but the decline in gasoline prices suggests that this inflation shock may have peaked.
- Core CPI rose by 2.82% year-on-year, with a month-on-month slowdown to 0.21%, slightly below expectations. Core goods prices recorded their first month-on-month decline since May 2025, with the largest component, rent inflation, simultaneously falling back to a normal level of 0.3%.
- According to the CME FedWatch tool, after the data release, the market's expectation that the Federal Reserve (Fed) will keep rates unchanged at the June meeting rose to over 95%, while the implied probability of a rate hike within the year remains close to 70%.
Energy Drives Overall Index to Highs, Month-on-Month Growth Convergence Suggests Inflation Peak
Data from the U.S. Bureau of Labor Statistics (BLS) shows that the year-on-year growth rate of the CPI in May rose to 4.17%, a new high since 2023. The energy component rose by 3.9% month-on-month, driving more than 60% of the overall CPI increase. However, as the average U.S. gasoline price fell from a high of $4.5 per gallon, the overall CPI month-on-month growth rate converged from 0.64% last month to 0.47% in May. Wall Street buy-side institutions generally assess that the May data likely constitutes the inflation peak of this round of commodity price shocks.
Core Goods See First Month-on-Month Negative Growth in a Year, Rent Statistics Disturbance Cleared
Compared to the energy-dominated overall CPI, the core CPI, which the Federal Reserve (Fed) pays more attention to, showed moderate performance. The core CPI recorded a year-on-year increase of 2.82% in May, with a month-on-month growth of 0.21%, slightly below expectations. Structurally, the core goods component fell by 0.1% month-on-month, marking the first negative month-on-month growth since May 2025, driven by declines in new car, drug, and furniture prices. Meanwhile, the largest component, rent, saw its month-on-month growth rate fall from 0.6% to a normal 0.3%, confirming that the previous surge was a one-time statistical adjustment.
Marginal Risk of Second Inflation Temporarily Eased, Terminal Prices Not Widely Spread
The decline in multiple underlying data indicates that although upstream supply chain and commodity costs remain high, price pressures have not yet systematically transmitted to terminal services and a wide range of non-energy goods, significantly reducing the probability of inflation entering a second spiral of widespread increase. Due to the downturn in core goods prices and the normalization of service inflation, the marginal risk of second inflation, which previously suppressed risk asset valuations, has been substantially eased, and the pricing momentum of terminal retailers has significantly weakened.
Interest Rate Market Pricing Remains Stable in the Short Term, Probability of June Policy Rate Hold Soars
The global short-term interest rate swap market reacted immediately to the data, with U.S. Treasury yields fluctuating narrowly across maturities. FedWatch derivative pricing shows that the probability of the Federal Reserve (Fed) announcing to maintain the current rate range at next week's meeting has soared to over 95%. The visibility of the short-term policy rate path has improved after the release of this inflation report, with the market generally expecting monetary authorities to adopt a wait-and-see moderate strategy next week to digest accumulated policy effects.
Tail Variables of Tightening Cycle Not Yet Eliminated, June Fed Decision to Face Three Major Reassessments
Although the probability of holding steady at the June meeting is extremely high in the short term, due to the stickiness of core inflation, traders' implied probability pricing for another Fed rate hike within 2026 remains locked at a high level close to 70%. The focus of the subsequent policy path game has shifted to next week's policy meeting. The market will closely watch the revision of the terminal rate in the dot plot, whether the announcement of a pause in the quantitative tightening (QT) balance sheet policy will be made, and whether the forward guidance on tightening language will be softened. If the dot plot unexpectedly moves up or the forward guidance remains tough, asset prices will face repricing pressure even if no action is taken in June.
