The May CPI in the United States may be unable to hide the rising trend of inflation. Is there no hope for the Federal Reserve to cut interest rates this year?

The US CPI report for May, which will be released on Wednesday evening Beijing time, may further support optimistic expectations for the pace of interest rate cuts by the Federal Reserve. However, investors should not be too complacent. A careful examination of key market signals reveals that US inflation may have bottomed out and is now on an upward trajectory. According to market pricing, it is expected that by the second half of 2025, the year-on-year growth rate of US CPI will rise to above 3%. The good news is that this is better than the market's initial expectation after the tariff announcement on April 2nd, when CPI pricing almost reached 4%. However, based on this expectation, the market should not expect the Federal Reserve to cut interest rates in the short term. May inflation rate may slightly increase If market expectations are correct, analysts predict that the inflation rate for May will rise from 2.3% in April to 2.5%, which may just be the beginning of an increase in inflation rates. In addition, core CPI is expected to rise from 2.8% in April to 2.9% in May, with the month-on-month growth rate of core CPI increasing from 0.2% to 0.3%, while the overall month-on-month growth rate of CPI remains at 0.2%. CPI swap contract pricing shows different expectations, with overall CPI expected to increase by 0.3% month-on-month and by 2.4% year-on-year, possibly lower than market expectations. Meanwhile, the US financial trading and forecasting platform Kalshi expects CPI to increase by 0.2% month-on-month and by 2.4% year-on-year, with core CPI increasing by 0.3% month-on-month and by 2.9% year-on-year. This seems to indicate that the 2.3% reading of April CPI will be a recent low point, and it should be expected to start rising. More importantly, according to market pricing, the index is expected to rise to around 3.2% by September. Returning to the trend Essentially, CPI will return to its trend growth level, as it has been since June 2022. The growth path has changed from the super high growth level starting in the summer of 2020 to the current level. Currently, the annualized growth rate is about 3%, which has been relatively stable for some time. The more important question is whether tariffs will have a greater impact and change the seemingly stable trend of inflation seen in the past three years. This has already been reflected in regional Fed surveys of price payment indices and ISM services and manufacturing reports. The data suggest that CPI changes year-on-year tend to lag behind these price payment indices by about six months. So, if price payment indices start to rise in January, it may not be until the data in June that these changes are reflected in the CPI report. This is basically the pricing consideration made by the derivatives market when considering expected inflation rates. The market believes that the price increase observed in this survey data will ultimately be reflected in inflation reports such as CPI and PPI. Rate cut issue If it is expected that the inflation rate will rise to 3.2%, then it will be difficult for the Federal Reserve to cut interest rates in the short term, as the federal funds rate is currently at 4.3% and the inflation rate is 3.2%. This would mean that the actual federal funds rate is around 1.1%, which is consistent with the neutral rate level that the Federal Reserve believes in according to its March economic forecast summary. If the inflation rate for the next year is lower than the market's expected 3.2%, then the Federal Reserve can loosen its policy rate. If CPI rises faster, the Federal Reserve can wait and see if this trend will continue to rise. This week's CPI report is expected to be relatively stable, and may even be lower than analysts' expectations. Therefore, experts will cheer that tariffs will not cause inflation, and calls for interest rate cuts will become stronger. However, based on market expectations and the index of actual payment prices, they may be wrong, and over time, hard data may also prove them wrong. Currently, according to the CME FedWatch tool, the market generally expects two interest rate cuts this year.