US CPI: how will core PCE be affected? - Nomura

Analysts at Nomura offer a review of the CPI data that rocked the dollar overnight.

Key Quotes:

"Headline CPI fell 0.128% m-o-m in May, a little weaker than expectations (Consensus: 0.0%, Nomura: -0.052%). The y-o-y headline CPI inflation slowed to 1.9% from 2.2% previously. Among non-core components, there were no major surprises. However, core CPI showed another weak reading of a 0.1% (0.063%) m-o-m increase, below expectations (Consensus: +0.2%, Nomura: +0.159%).

Core CPI inflation fell short of market consensus for three consecutive months. Among core components, the weakness was concentrated in goods prices such as apparel (-0.8%), new vehicles (-0.2%) and used vehicles (-0.2%). Although imported consumer goods prices have been on an upward trend, consumer goods prices remained weak, suggesting that domestic factors such as an oversupply of vehicles and increasing closings of brick-and-mortar retail shops could have held down domestic goods inflation. In this sense, it might become more difficult for the FOMC to attribute "transitory factors" to the persistent weakness in core inflation. On the service side, wireless telecom service prices were essentially flat after having declined sharply in the prior two months. Regular rent inflation picked up a little bit to +0.346% from +0.302% previously while homeowners' equivalent rent remained relatively weak at 0.195%. 

Based on CPI and PPI data for May, the May core PCE price index is estimated to rise only moderately by 0.02% m-o-m. On the y-o-y basis, core PCE inflation is now likely to fall again to 1.4% in May from 1.5% in April. The deviation from the FOMC’s target is expected to widen further, which has the potential to slow the pace of monetary tightening."