• Core CPI at 0.16% m/m was the softest in almost three years
  • Core services inflation tumbled
  • Breadth improved, underlying details were supportive
  • Core PCE could be very soft at month-end
  • This is the first soft print after a string of hot ones…
  • ...raising the risk that markets are overreacting….
  • ….ahead of Chair Powell’s cautious optimism
  • Canadian rates followed suit, 5s may be getting pricey
  • US CPI / core CPI, m/m % SA, May:
  • Actual: 0.0 / 0.16
  • Scotia: 0.2 / 0.3
  • Consensus: 0.1 / 0.3
  • Prior: 0.3 / 0.3
  • US CPI / core CPI, y/y %, May:
  • Actual: 3.3 / 3.4
  • Scotia: 3.5 / 3.5
  • Consensus: 3.4 / 3.5
  • Prior: 3.4 / 3.6

This is a great report! But settle down folks, it’s just one print. It’s an encouraging one, but the evidence bar for the Federal Reserve to be cutting any time soon is set much higher than a single inflation print.

Nevertheless, core CPI inflation landed at 0.16% m/m SA for the softest reading since August 2021. Underlying details were even better as they showcased very soft core services inflation that now joins soft core goods inflation, alongside further improvement in the breadth of price changes.

Chart 1 shows the drop in annualized core CPI. Chart 2 serves as a reminder of translation risk into core PCE later this month. Core PCE could be quite soft given its lower weight on shelter and higher weight on core services inflation that appears to have imploded. It’s feasible that on June 28th we’ll get the first one-handled core PCE m/m SAAR reading in about six months or even lower. Core PCE puts a lower weight on shelter that was still firm in CPI, and a higher weight on core services inflation that apparently tanked last month.

Chart 1: US Core CPI Inflation Progress; Chart 2: US Core CPI & Core PCE


Markets reacted with a violent positioning swing that brought the US 2-year yield down 13bps to 4.69% which is getting back down to levels last seen in early April before a two-month rates sell off ensued. The US 5s yield fell similarly to 4.26% and is arguably still cheap. The dollar immediately depreciated including on a DXY basis, against almost all major and semi-major crosses, and including a half-cent appreciation in the C$ relative to the USD.

Still, bear in mind that for the most part the US 2-year yield has only taken out the jump that occurred after last Friday’s nonfarm payrolls report. On net, the yield is about 5–6bps lower than it was before nonfarm with this morning’s reaction.

Fed funds futures are now pricing about 21bps of a cut by September which is consistent with our call for a first quarter-point reduction at that meeting. July 31st FOMC cut pricing only marginally increased but is still a rounding error, albeit that the door cannot be slammed on that meeting with one more CPI and two more PCE reports due by then. Markets are pricing a little over 50bps of easing this year which is also our call.

Canada’s curve followed suit with a 12bps rally on the day in 2s and 5s. In my opinion, Canada 5s are starting to look a little pricey whereas US 5s arguably remain cheap in absolute terms and relative to Canada.


Still, it’s a single print. Core CPI at 2.0% m/m SAAR in May follows six months of three- and four-handled readings.

I wouldn’t expect Chair Powell to come out doing waist high leg kicks and pirouettes on this one print during his presser this afternoon. He’ll sound encouraged and retain the cautious optimism he had in his last presser, but say they don’t yet have the required ‘greater’ confidence toward achieving dual mandate goals to begin easing.

Much of their slowing growth and rebalancing narrative remains only partly achieved and requires further evidence to take the economy away from excess demand as a driver of inflation toward balance.


Chart 3 shows that the bottom fell out of core services inflation last month. At 0% m/m SA, CPI services less energy and housing was the softest reading since September 2021. 

Chart 3: US CPI Core Services Ex-Housing

Chart 4 shows that this development joined still soft core goods inflation.

Chart 4: US Goods Inflation

Breadth also continues to improve (charts 5, 6). 

Chart 6: US Inflation Showing Falling Breadth; Chart 7: US Inflation Showing Falling Breadth

Charts 7 and 8 show the breakdown of the CPI basket in y/y terms and weighted contributions to the headline y/y inflation rate respectively.

Chart 7: May 12-Month Changes in US Headline CPI Categories; Chart 8: May Weighted Contributions to the 12-Month Change in US Headline CPI

Charts 9 and 10 do likewise for the month-over-month changes in the basket’s prices.

Chart 9: May Changes in US Headline CPI Categories; Chart 10: May Weighted Contributions to Monthly Change in US Headline CPI

Charts 11–19 offer further charts across select components.

Chart 11: US Food Prices; Chart 12: US CPI: Gasoline; Chart 13: Sticky Housing Inflation; Chart 14: US Rent Inflation
Chart 15: New vs Used Vehicle Inflation; Chart 16: US Apparel; Chart 17: US CPI: Household Furnishings; Chart 18: US CPI: Recreation Services
Chart 19: US Airfare

The appendix provides a fuller break down of the report with micro charts and z-score measures of deviations from recent performance.

Table: US Inflation Component Breakdown
Table: US Inflation Component Breakdown
Table: US Inflation Component Breakdown