US inflation data released Wednesday showed continued price pressures on the world's largest economy, with the annual inflation rate rising to 4.2% in May, compared to 3.8% in April, in line with market expectations and confirming that inflation remains far from the Federal Reserve's 2% target.
The data showed that the Consumer Price Index rose by 0.5% on a monthly basis during May, the same pace recorded in the previous month and matching analysts' estimates, reflecting the continued impact of rising energy costs and some commodities on price levels.
Conversely, the data showed some limited signs of easing underlying inflationary pressures, as the core consumer price index, which excludes food and energy, recorded a monthly increase of only 0.2% compared to expectations of 0.3%, while the annual rate remained steady at 2.9% in line with estimates.
Background: War and energy prices bring inflation back to the forefront
May's data has acquired exceptional importance amid growing fears that a war between the United States and Iran could trigger a new wave of global inflation through rising oil, shipping and energy prices.
Despite the sharp rise in the Consumer Price Index driven by soaring energy prices, the report's details painted a more moderate picture: prices for transportation, health insurance, and new cars all fell. But this does little to alleviate consumer anxiety, as economists predict further price increases, potentially keeping the possibility of an interest rate hike this year on the table for Federal Reserve officials.
Even if a resolution to the conflict is reached soon, high costs are likely to persist until oil production returns to normal. In addition to the initial shock to the energy sector, disruptions in fertilizer markets could ultimately lead to higher grocery bills, while increased transportation costs could drive up prices for all types of consumer goods.
Over the past few weeks, oil prices have jumped to high levels as tensions in the Middle East continue and the Strait of Hormuz remains closed to much of the trade and energy traffic, prompting markets to reprice their expectations regarding inflation and interest rates.
The data also came just days after a strong US jobs report that exceeded expectations, reinforcing the belief that the US economy still retains strong momentum that will allow inflationary pressures to continue for a longer period.
Markets after the data release
Financial markets reacted negatively to the release of the US inflation data for May, although most of the readings were in line with expectations, as investors focused on the continued rise in annual inflation at relatively high levels, along with concerns that US interest rates will remain high for a longer period.
In the precious metals market, gold came under strong selling pressure following the data release, with gold futures falling by approximately 2.27%, or $97.39, to trade near $4,189 per ounce. Spot gold also declined by 2.20% to around $4,166, indicating a decrease in demand for the yellow metal amid continued bets on monetary tightening.
In the currency market, movements were relatively limited, with the dollar index futures contract falling 0.03% to 99.86 points, reflecting traders' anticipation of the Federal Reserve's next move.
In the US stock markets, selling pressure dominated the futures contracts for the major indices, with Dow Jones futures falling by about 340 points or 0.67% to trade near 50,569 points.
S&P 500 futures fell 0.77% to 7,336 points, while Nasdaq 100 futures suffered the biggest losses among the major indexes, dropping 1.31% or more than 382 points to 28,735 points.
These moves suggest that investors did not view the inflation data as sufficient to alter the course of US monetary policy. Markets appear to be interpreting the data as reinforcing the scenario of keeping interest rates high for an extended period, particularly after last week's strong jobs report, which weighed on growth and technology stocks and triggered a fresh sell-off in Nasdaq futures.
The sharp drop in gold also reflects declining expectations of any near-term easing of monetary policy, as the precious metal usually comes under pressure when the likelihood of real returns and interest rates remaining at high levels increases.
In general, it can be said that the markets received the inflation data as support for the continuation of the Federal Reserve’s hawkish approach rather than as an indication of easing price pressures, which was reflected in the decline of gold and the drop in US stock futures, while the dollar remained relatively stable, awaiting further indications about the course of monetary policy in the coming months.
