US: Stable inflation gives the Fed flexibility to respond to trade risks – RBC

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Josh Nye, senior economist at the Royal Bank of Canada, notes that the both headline and core CPI of the US rose 0.1% in May.

Key Quotes

“Headline inflation slowed to 1.8% year-over-year and core dipped to 2.0%; both were a tick below consensus.”

“Core CPI inflation has been within 0.4 ppts of the 2% mark since 2011. The PCE deflator, the Fed’s preferred price measure, has been a few ticks lower on average and stood at 1.6% in April.”

“Today’s inflation report keeps the Fed’s options open. With the US economy showing few signs of inflationary pressure (at least from a consumer price standpoint), the central bank has leeway to respond to any slowdown in growth caused by tariffs and trade policy uncertainty.”

“Further escalation of the US-China trade dispute would increase the likelihood of a pre-emptive move from the Fed. Markets don’t appear to have high hopes for a potential Trump-Xi meeting, fully discounting a rate cut at the Fed’s July meeting and pricing in another move by October.”

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