USD Rates: The inflation conundrum
Surprisingly muted inflation.
Group Research - Econs, Eugene Leow10 Jun 2025
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For all the worries about inflation, actual price pressures have been surprisingly muted in the US thus far. April’s CPI barely hit 2.3% YoY even as Trump imposed reciprocal tariffs. Granted, this is just one month of data, but it does not appear that the market is too concerned about a price spike in May either. Consensus expects CPI to rise by 0.2% MoM sa (2.5% YoY) while inflation swaps are pricing in an even more benign take (2.4% YoY). Further out, inflation swaps are factoring a rise in CPI above 3% from August as favourable base effects fade. Difficulties in estimating CPI stem from several moving parts. First, there are several components of the CPI basket where inflation is cooling (shelter and energy). This has helped flatter headline inflation. Second, given inventory stocking (ahead of tariffs), smoothed passthrough of price increases, negotiations with suppliers and the evolving tariff landscape, the timing and magnitude of the inflation hit becomes tricky. Uncertainties on this front (and a still-resilient labour market) is probably the key reason why the Fed has not cut rates despite the real FFR being higher than 2% (still in restrictive territory). Current market pricing of 50bps cuts in 2H25 assumes a still resilient labour market and contained CPI (perhaps running at around 0.2% MoM on average). This is broadly in line with our view, but we caution that tails on both ends are fairly fat with significant uncertainties on the labour market and price pressures ahead.




Eugene Leow

Senior Rates Strategist - G3 & Asia
[email protected]
 



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