Powell heat
Powell heat (AI image)

Trading US CPI on Tuesday will be particularly tough because it comes the day before the FOMC decision. With the market pricing in just a 25% chance of a hike, it would take an enormous beat on expectations to flip the script.

A big reason why the market is so confident that the Federal Reserve will skip a meeting is because year-over-year CPI in May is destined to plunge.

This report laps the May 2022 report of +0.9% m/m inflation, meaning that number will fall out of the calculation. That will put tremendous downward pressure on the y/y number and the consensus is 4.1%, from 4.9%. Even a beat with 4.2% or 4.3% would continue to show a firmly downward trend and the highest economist estimates are at 4.3%. This isn't a wildly volatile number and economists have a good grip on where it will be, so a 4.4% reading or higher is decidedly unlikely.

In the bigger picture, I continue to love this illustration of the path of inflation based on upcoming m/m readings.

Where US CPI is headed

This month's reading is expected at 0.2% m/m and that's going to be the limit of what the Fed can tolerate for awhile.

What makes it even tough for the Fed to make a true dovish pivot is that core inflation is running high and a dip in gasoline or food prices won't have any effect.

Core hasn't printed below 0.3% since August 2021 and this month is expected at +0.4%.

core CPI mm
core CPI mm

So while the market is excited about rapidly-falling CPI for May/June, there's a good argument for thinking about what inflation will be in December instead. That's the question the FOMC is wresting with and as the stock market hits a 52-week high, they're likely to conclude that more needs to be done.

For more of what's expected from the CPI report, see the economic calendar.