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Inflation Rises In Line With Expectations

USD bulls were given some encouragement this week as the latest data showed May inflation in the US printing in-line with expectations, with the headline measure rising 0.2% month-over-month. This latest increase raises the inflation rate to 2.8% from 2.5% in April, marking the fastest increase since 2011. The increase in inflation was driven mainly by higher gasoline prices which increased by 1.7% month-over-month, offsetting the declines seen elsewhere in other energy components alongside no movement in food prices.

Core CPI also came in-line with the market forecast, rising 0.2% month-over-month, moving the annual core reading up to 2.2% from 2.1% over the prior month. However, core goods remained soft, falling -0.1% on the month and declining -0.3% on the annual reading. The recent bout of USD strength is potentially acting to further constrain the already limited pass through effects from past USD depreciation.

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Looking further at the data, used cars and trucks also continued their downward trajectory due to the wave of vehicles that have come off leases, falling -0.9% month over month. Apparel was unchanged on the month while the strongest contribution came from medical care with prescription drugs jumping 1.4% month over month. Core services rose 0.3% month over month and 3% year over year led by shelter. The rest of core services, however, was soft as medical care fell -0.1% and both core transportation and recreation were flat on the month.

This latest inflation report confirmed the continued improvement in CPI for the Fed, which has been helping to life PCE inflation to the Fed’s 2% target. With this in mind, the Fed raised rates ...

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