US headline consumer price index (CPI) increased by 0.1% m/m, 4.0% y/y in May (from 0.4% m/m, 4.9% y/y in Apr), the lowest headline inflation reading since Mar 2021 (2.6%) and the second below 5% print in a row. However, core CPI (which excludes food and energy) proved to be stickier, as it rose sequentially at 0.4% m/m, (same as Apr and Mar), and compared to one year ago, it eased slightly to 5.3% y/y in May (from 5.5% in Apr). 

Goods inflation fell by -0.2% m/m in May (from 0.6% in Apr), due mainly to the fall in energy prices, and compared to a year ago, it also increased at a slower pace of 0.8% y/y (from 2.1% y/y in Apr). However, services inflation increased at a faster 0.3% m/m (from 0.2% in Apr), translating to a 6.3% y/y rise in May (lower from 6.8% in Apr), still elevated but is now matching that of Jul 2022 (6.3% y/y). 

US Inflation Outlook – For 2023, we still expect both headline and core inflation to ease to an average of 3.0%, and above the Fed’s 2% objective. While the m/m decline in prices of energy (especially gasoline) and some discretionary items were welcomed developments, the modest but positive m/m reacceleration of shelter costs and food prices showed that it is premature to say that a clear disinflation trend has set in for US CPI, even though we still expect accommodation costs to ease more visibly in 2H 2023. Core and services inflation remain elevated (y/y) and rising (m/m), while the continued wage growth may still add to services cost pressure.