US CPI Overview
Thursday's US economic docket highlights the release of the critical US consumer inflation figures for May, scheduled later during the early North American session at 12:30 GMT. The headline CPI is expected to rise by a modest 0.4% during the reported month. Conversely, the yearly rate is anticipated to have accelerated to 4.7% from 4.2% in April. At the core level, the CPI is predicted to have increased 0.4% in May and the yearly rate is projected to come in at 3.4%, up from 3% prior.
According to analysts at Deutsche Bank: “We are of the view (shared by the Fed’s leadership) that this current episode is likely to prove temporary thanks to one-off factors such as those associated with the economic reopening and base effects. Indeed, the strength in core CPI last month was largely due to categories at the epicentre of the covid pandemic, where there were likely severe supply/demand imbalances related to reopening or stimulus-boosted demand.”
How could it affect S&P 500?
The US CPI will be another important macro data that would set the tone for the upcoming FOMC meeting on June 15-16. The Fed has repeatedly mentioned that rising prices will be temporary as the economy continues to rebound from the pandemic-induced recession. The markets also seem aligned with the Fed's dovish view. A softer reading will further reaffirm the transitory narrative and remain supportive of the underlying bullish tone in the financial markets.
That said, a sharper-than-anticipate increase will put heavy pressure on the policymakers to defend their views and fuel speculations that the Fed might begin discussion on tapering its bond purchases. An overshoot will also fuel concerns that there is more than the low base effect that is pushing prices higher and trigger a bit of panic in the markets. This could act as a headwind for perceived riskier assets, like equities. However, investors are likely to see if inflationary pressure is sustainable, suggesting that immediate reaction is more likely to be short-lived.
About the US CPI
The Consumer Price Index released by the US Bureau of Labor Statistics is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. The purchasing power of USD is dragged down by inflation. The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as positive (or bullish) for the USD, while a low reading is seen as negative (or Bearish).
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