US inflation continues to be on upward trend, Fed unlikely to hike rate in June

The US headline CPI inflation in April accelerated to 1.1% y/y from 0.9% in March, in line with consensus expectations. The rise was partially because of an increase of 3.4% in energy prices last month, the most solid pace in over three years. April’s headline CPI inflation print is the highest since February 2013.

The inflation rate is likely to drop slightly in the next few months because of base effects. But assuming a rising trend in oil prices, inflation is likely to accelerate more than 2% y/y by the end of this year, said Nordea Bank in a research report.

Meanwhile, core CPI inflation decelerated 0.1 percentage point to 2.1% y/y last month, on par with projections. But core prices have still recovered strongly at an annual rate of 2.5% year to date. Core CPI inflation in April 2015 was 1.8% y/y. Core services prices rose strongly 3% y/y, whereas core goods prices eased by 0.5% y/y.

The US Fed’s preferred core inflation measure, PCE inflation, is likely to have stayed at 1.6% last month, only 0.4 percentage points lower than the target rate of 2%. Even though core CPI and core PCE inflation have eased slightly from  their earlier gains, the trend is moving upwards through 2016, mainly due to solid wage growth, diminishing drags from the USD and oil prices, and weak productivity growth, added Nordea Bank.

In all, the CPI inflation figure for April is not expected to conclude the debate whether the US Fed should hike rates in June or not.

“While a June rate hike is a possibility, we see it as rather unlikely, given the recent softer US economic data, the UK Brexit vote on 23 June and the fact that markets are currently pricing in probability of just 6% of such a move”, noted Nordea Bank.

The US Fed is likely to next raise its interest rate in December; however, there is a probability of the central bank hiking in September if the economic growth accelerates to 2% and the jobless rate begins declining again during the summer, stated Nordea Bank.