- Year-on-year percentage changes in both headline and core (excluding food and energy) CPI were higher than the previous month but exactly in line with expectations. The headline CPI rose by 4.2% in the twelve months to end May, compared with 3.8% to end April. The core CPI rose by 2.9% in the twelve months to end May, compared with 2.8% to end April. Both measures are meaningfully above the Fed’s 2% target. Moreover, both measures have increased in each of the past three releases.
- Some commentators focussed on the smaller-than-expected month-on-month increase in core CPI (0.2% in May versus 0.4% in April and 0.3% consensus). While it is possible this is the start of more favourable underlying inflation dynamics, it is too early to tell. One month does not make a trend.
Entrenched inflation – what it means for Fed policy and Treasury yields
Investment Insights • Macro
2 min read
Entrenched inflation – what it means for Fed policy and Treasury yields
The US consumer price index (CPI) data released on 10 June 2026 was consistent with strong underlying inflationary trends, despite optimism in some quarters regarding the monthly changes. There are several points worth highlighting contained within the release, as Deputy Chief Investment Officer Daniel Murray highlights in this Macro Flash Note.
- The Fed’s preferred measure of prices is the core personal consumption expenditures (PCE) deflator, for which the May data will be released on 25 June. The CPI data is always released around ten days to two weeks prior to the PCE deflator data. Historically, the year-on-year % change in the core PCE measure of prices has been around 0.3 to 0.5 percentage points lower than the year-on-year % change in the core CPI, as illustrated by the fact the black line is above the brown line for much of the time in Chart 2. If that were true today, it would paint a slightly more benign picture of inflation. However, it is notable that the core PCE deflator measure of inflation has been above the core CPI measure since November 2025. If that same pattern is followed, that would suggest inflation as measured by the May core PCE deflator remains close to 3.5%.
- Shorter term trends paint a more nuanced picture. Looking at CPI inflation as measured over six months shows a decline in the core goods measure but increases in housing inflation and core services ex housing. While core goods disinflation is welcome, the increase in core services ex housing inflation to 5.3% (annualised over the past six months) is more worrisome.
Overall, this release shows that inflation trends remain well entrenched at both the headline and core levels. If anything, inflation trends look like they are moving in the wrong direction. This will make it very difficult for the Fed to cut rates any time soon. Before easing policy, the Federal Open Market Committee will need to see strong evidence of declining inflation and have a high degree of confidence that it is going to move back to target in the near future. Typically, that would entail at least two consecutive months of declining inflation. Until then, we expect the outlook for Fed policy to remain on the hawkish side and Treasury yields to remain elevated.