CPI: 3 Wall Street economists react to today's inflation numbers

Following the latest US inflation data, Wall Street economists have been quick to offer their views on the numbers. 

After the data release, stocks rallied, with the S&P 500 currently up 1.1% and the Nasdaq climbing 1.6%. Meanwhile, US treasury yields declined. 

Breaking down the CPI report

This morning’s core CPI release for May was much cooler than expected. The month-on-month core inflation rate for May came in at 0.2%, below the expected 0.3% forecast. Meanwhile, the consumer price index rose at an annual pace of 3.3% in May, down from the previous month’s reading of 3.4%, which was also the forecasted reading for this month. 

Meanwhile, the May core inflation rate year-on-year came in at 3.4%, below the forecast of 3.6%, while the month-on-month inflation rate in May was flat. 

Analysts at Evercore ISI explained that clothing, new vehicle prices, and transportation services contributed most of the downside surprise to the core reading. 

What are Wall Street economists saying

Following the data release, analysts at Capital Economics said that while they still need to see the PPI data tomorrow, it looks like core PCE, the Fed’s preferred inflation metric, increased significantly less than 0.2%, “making it the first month this year when core prices have come in not just consistent with the 2% annual target, but below it.”

“Our early calculations suggest that core PCE prices increased by only 0.13% m/m. Which would only be 1.6% on an annualised basis,” said Capital Economics. “That’s the sort of below-target A+ data Fed officials like Christopher Waller have been waiting for.” 

Overall, the firm believes the fundamentals are encouraging, and a September rate cut is still in play. 

US investment bank Morgan Stanley (NYSE:MS) said, “Incorporating inputs from CPI, we now forecast core PCE inflation increased 0.12%M in May vs. 0.25%M in April.”

“This would lower the y/y from 2.75% to 2.58%. Headline PCE is forecasted at 0.01%M vs. 0.26%M the month prior. Core services ex housing translation points to 0.15%M in May vs. 0.27% prior,” wrote the bank.

They explained that a core PCE print aligned with their expectations would be the weakest this year, and the second consecutive reading, adding to the convincing evidence the Fed needs to start cutting in soon. 

The bank expects more deceleration ahead, especially in 2H24. Morgan Stanley maintained its call for a first cut in September this year, followed by cuts at every meeting through mid-2025.

Evercore ISI believes the cooling of inflation is continuing as most leading indicators for inflation are soft. 

“These releases suggest lower Treasury yields and inflation expectations. The core PCE deflator should be up around 0.15% m/m in May,” explained Evercore. “We tentatively estimate payroll employment will climb 200K in June. The unemployment rate would stay at 4.0%. The CPI and PPI releases are key indicators for filtering those with and those without such pricing power.”