We see core CPI inflation as likely moderating to 0.2% MoM from 0.376% in April as a temporary boost from technical adjustments to rent-related components diminished. Our forecast for May core PCE inflation is 0.33% m-o-m, up from 0.24% in April, which translates into its y-o-y change rate of 3.4%. Our forecast for headline CPI inflation is 0.45% m-o-m or 4.2% y-o-y. The May CPI report will likely show some spotted strength, reflecting global shortages of semiconductors (e.g., computers) as well as higher jet fuel prices (e.g., airline fares). Core goods inflation looks like a tug of war between waning tariff impact and newly emerging price pressures. We expect super core inflation moderated due to a lack of hotel price inflation and negative residual seasonality. Regular rent and OER inflation in April were boosted by positive payback after last year’s carry-forward imputation in October. Without the impact from this technical adjustment, inflation of rent-related components should return to a gradual downward trend in May. On a whole, the laser focus of current Fed from inflation risks is unlikely to be wavering by May's CPI report. Strong aggregate demand, the AI investment boom, and a series of supply shocks all pose upside risk to the medium-term inflation outlook. We maintain our Fed call of no changes in the policy rate through the end of 2027 although market is currently pricing in 25 bps of hike by end CY26. We do not have any strong views on the US yield curve now. But we remain +ve on DXY. Last week close was above 100 which is a +ve sign for DXY. We now expect 100.60 and subsequently 102 as next target levels for DXY.
