US Inflation details ease concerns of energy spillover effects
The current commentary indicates a lessening of inflation concerns in the U.S. as core inflation showed unexpected resilience despite a spike in gasoline prices impacting the headline figures. Per the full note from ING, while headline inflation increased 0.5% month-on-month in May, the core inflation rate was softer than anticipated at 0.2% month-on-month, suggesting that underlying price pressures may not be as acute as previously feared. This divergence has led to a subtle shift in Fed rate hike expectations, with the probability of a 25 basis point increase by 2026 slightly diminished. Overall, this easing inflation narrative may support a more stable outlook for the USD against other currencies in the near term, especially as gasoline prices are expected to moderate in the coming months.
What the desk is arguing
The desk posits that easing inflation concerns in the U.S., particularly from the latest core CPI print, could stabilize the USD in the near term. Per the commentary, core inflation rose only 0.2% month-on-month, falling below the consensus estimate of 0.3%, which adds a cushion against aggressive rate hike expectations from the Federal Reserve.
Supporting this view, the sharp rise in gasoline prices contributed to the headline inflation rate of 4.2% year-on-year. However, this spike is likely to reverse as prices at the pump have already started to decline. With national gasoline prices averaging $4.15/gallon after peaking at $4.50, we may anticipate a significant impact on the upcoming CPI metrics.
Where it sits in our coverage
As of now, our consensus target for the USD is 1.075, with a range from 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 for Mar26 - bofa: 1.04 for Mar26
This aligns moderately with the current desk's call, which suggests that steady core inflation may prevent significant depreciation of the USD, positioning us toward the upper bound of the consensus range.
How other firms see it
Firms aligned with the desk's view, like jpmorgan, anticipate a stable near-term outlook for the USD. Conversely, bofa expresses more caution, positing potential weakness against other currencies.
Given this backdrop, watch the USD/EUR pair as it could reflect the contrasting trajectories in policy expectations from the respective central banks. The ongoing U.S. inflation narrative continues to provide context for valuation movements in forex markets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Core inflation softened to 0.2% MoM, below the 0.3% consensus forecast.
- 02Gasoline price increases significantly influenced headline inflation but are expected to reverse.
- 03Fed rate hike expectations for reaching a 25bp increase by 2026 have lessened.
- 04These inflation dynamics might stabilize the USD's position against major currencies.
Market implications
Traders should monitor the USD/EUR and USD/JPY pairs for signals of volatility stemming from shifts in inflation data. As gasoline prices normalize, any divergent moves in inflation metrics may signal further positioning adjustments, specifically looking for opportunities around 1.075 levels against the EUR.
Risks to this view
If energy prices surge unexpectedly or if core inflation shows a rapid increase in the coming months, this could prompt a reassessment of the Fed's interest rate trajectory and lead to a reversal in the current USD stability narrative.
Articles US Inflation details ease concerns of energy spillover effects 14:56 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download While US headline inflation was lifted by sharp gasoline and airline fare increases, other components were better behaved, leading to a softer-than-anticipated core inflation print. June's inflation rate should be pulled lower by a reversal in gasoline, but inflation remains vulnerable to ongoing volatility in energy costs James Knightley Headline inflation rose in May but core inflation was softer than expected Core inflation better behaved than expected The May consumer price inflation report rose 0.5% month-on-month/4.2% year-on-year at the headline level, as expected, but core inflation was a touch softer at 0.2%MoM/2.9%YoY versus the 0.3% consensus forecast and the 0.4% print from April. To three decimal places it was a 0.208% core CPI MoM print.
Prior to the release, there was a clear skew in economists’ forecasts towards the prospect of a 0.2% outcome being more likely than a 0.4% outcome. Nonetheless, the chart below shows that the MoM rates continue to run hot relative to the 0.17% MoM trend that is needed to bring the annual rate of inflation back down to 2%. As such, market reaction is fairly muted though, with 10Y yields down around 3bp and Fed rate hike expectations for 2026 being pared back to 25bp from 28bp.
Core consumer price inflation metrics (MoM%, 3M annualised, YoY%) Source: Macrobond, ING "> Source: Macrobond, ING Government shutdown effects unwind The details show a 7% MoM jump in gasoline prices did the damage at the headline level, but this should reverse in the June CPI report given that gasoline prices nationally are back down to $4.15/gallon after averaging $4.50 through May. Airline fares were also a strong upward influence, rising 2.7% while education rose 0.8% and other goods and services rose 1%. Counteracting these components, we saw a 0.3% price drop for new vehicles while housing, which has a 44% weighting within the inflation basket, rose just 0.2% MoM.
Remember it had jumped 0.7% MoM last time due to survey methodology that uses a sample panel that rotates on a six-month time frame. Because the Bureau of Labor Statistics entered a 0% outcome for October – when the government shutdown prevented any survey from being conducted – there was 'payback' in the April report. That effect has now unwound.
Waning tariff, rents and wage rates can help to mitigate energy threats Looking ahead, the housing components should show inflation pressures moderating further with private rent surveys (realtor.com, apartments.com, Zillow) pointing to outright declines in a growing number of states. Meanwhile, the Dallas Federal Reserve Bank estimates that tariffs are currently lifting the annual rate of core PCE inflation by 0.9ppt. Tariffs are a one-off step change in prices and we have since transitioned to a lower tariff regime, that includes many exemptions, following the Supreme Court’s decision to strike down 'Liberation Day' tariffs.
The refunds of those tariffs will provide relief for corporate America and should go some way to covering increases in energy/transportation costs they may be facing. Remember too, that the biggest cost input for corporate America is the cost of the workforce and with wage growth continuing to slow, that should also help take some of the steam out of core inflation, even if headline inflation remains vulnerable to volatility in energy prices. This should all help to keep inflation expectations in check, so while we no longer expect the Fed to cut interest rates this year given improved economic momentum, we don’t expect a rate hike either.
US Inflation Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author James Knightley Chief International Economist, US James Knightley is the Chief International Economist in New York.
He joined the firm in 1998 in London and has been covering G7 and Western European economies. He studied economics at Durham… In this article Core inflation better behaved than expected Government shutdown effects unwind Waning tariff, rents and wage rates can help to mitigate energy threats
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