Fake US CPI Data Undershoots

• US core CPI undershot market and consensus expectations

• Distorted seasonal adjustments lessened data reliability…

• ...as we await the estimate for the imputed share of the basket due to budget cuts

• Markets reacted more than the FOMC will

• US CPI / core CPI, m/m % change, SA, May:
• Actual: 0.08 / 0.13
• Scotia: 0.2 / 0.3
• Consensus: 0.2 / 0.3
• Prior: 0.22 / 0.24

US core CPI inflation was soft again in May. If you believe it, and I’ll come back to why you should be much more guarded toward data reliability than the market robots who pounced on the Treasury curve to drive lower yields in the aftermath. They’re putting the artificial in artificial intelligence in my books.

At 0.13% m/m SA, CPI excluding more volatile food and energy components was beneath both the implied market and consensus estimates that were both in the 0.2–0.3 range. Chart 1 shows the annualized m/m SAAR rates (1.6%). The 3moMA is 1.7%.

Headline CPI was up only 0.08% m/m SA which is only weaker than core CPI through rounding effects that basically shows both at 0.1%. Lower gasoline prices (-2.6% m/m SA) and a modest 0.3% m/m rise in food prices were both about as expected.

There were two main reasons for why CPI was soft. One is that core services CPI that excludes housing and energy services was only up by 0.06% m/m SA (chart 2). That’s at the low end of the recent monthly norms as only March’s –0.24% reading for that component was softer.

The other reason is that core goods prices were also soft. Commodities excluding food and energy were flat at 0% m/m SA (chart 3).

What drove soft core service prices? Rent of primary residence was the weakest reading since April 2021 without rounding. OER was firm and in line with expectations. Airfare was soft. Volatile financial service prices fell. Hospital service prices increased at a softer pace. Recreation service prices fell. Vehicle insurance was up at a similar pace.

What drove soft core goods prices? Apparel prices fell. New (-0.3% m/m SA) and used (-0.5%) vehicle prices slipped.

FAKE SA FACTORS

Now back to the reliability issue. The first reason why we should be careful is that seasonal adjustment factors drove the core CPI undershoot and I hadn’t expected that this time. The SA factors for May are normally more spread out than for some other months, but this time, the SA factors for 2025 and 2024 are among the lowest in history compared to like months of May (chart 4). This distorted the fact that in m/m NSA terms, the rise of core CPI really wasn’t at all out of the ordinary for a month of May (chart 5).

What effect that had is illustrated in chart 6. At alternative SA factors that have been used in prior months of May, core CPI could have easily rounded to about 0.2% m/m SA. That still would have been weaker than expected, but not quite as weak.

WHAT’S THE IMPUTED SHARE THIS TIME?

Then we have the issue of imputed data. We’re waiting for the BLS to update this post and this one with figures for May. Budget cutbacks have caused the BLS to rely much more heavily on shaky methods to make up inflation stats. Their April estimate showed that the share of the basket subject to alternative estimation methods—like relying upon prices for comparable products instead of actual products and relying upon prices in other regional markets absent data from as many of them as before—shot up to almost a third of the basket from a prior normal run-rate of about 10%. Triple the prior share of the basket was made up absent actual data collection. We need to see what the share was for May. It should be updated simultaneously, yet the last time it was at least updated on the same day as the CPI release itself.

One could surmise that the aim was to destabilize faith in institutions through cutbacks that lessen the reliability of the data so that you can argue that amid the uncertainty the Fed should bend the knee before the administration’s wishes.

TRUMP PUSHED THE FED AGAIN

President Trump weighed in after the fact with this post. On data reliability alone I would disagree with him. I’d also disagree because tariff and supply chain effects lie ahead with uncertain timing and magnitudes. But what I really disagree with is cutting by a full point just to lower interest on the debt. It could boomerang if the bond market blows up and drives longer yields through the roof while ditching the dollar because of a total lack of faith in a politicized Fed. It could boomerang if it drives inflation. All happening right into midterms.

CHARTS APLENTY!

Now for charts aplenty since many clients express support for including them. Charts 7–21 give a sampling of the trends in various key components.

Charts 22–23 break down the basket’s components in m/m % terms and in weighted m/m % contributions respectively. Charts 24–25 do likewise in y/y terms.

Finally, please see the accompanying table that breaks down the basket in greater detail.