Fed to retain the dovish tilt despite higher US inflation – UOB

Senior Economist Alvin Liew comments on the latest higher-than-expected US inflation figures.

Key Quotes

“On Thu (10 Jun), the May CPI data released by US Labor Department showed US price inflation topped forecasts with the y/y increase at the highest in decades but markets took the data in their stride, assessing that the bulk of the inflation was likely driven by transitory components, and consequently, US equity markets rose while both the US dollar and US Treasury yields edged lower.”

“US CPI rose 0.6% m/m in May, exceeding Bloomberg median forecast of 0.5%, and came on top of marked 0.8% increase in the prior month. Core CPI also surged 0.7% m/m, beating expectations of 0.5%. Compared to 12 months ago, CPI inflation was higher at 5% y/y in May, the highest inflation rate since Aug 2008 (5.3% y/y) while core inflation soared by 3.8% y/y, the largest increase since Jun 1992.”

“On the surface, the price gains looked fairly broad-based but on closer inspection, key price components were stable m/m, while the y/y readings were partly driven by base effects (due to the onset of the COVID-19 pandemic).”

“Despite the sharp 5% y/y spike in May, inflation still looks to be transitory on a combination of demand increase and supply chain bottlenecks at the restart of activities. Transport and energy inflation rose in part due to base effect. Our View: Still early for Fed to taper or hike rate.”