“Falling price pressures should be supportive of US government bonds and investors could also explore other quality fixed income assets in developed as well as emerging markets.”
- The latest CPI data for May was lower than the April number and was also below market expectations.
- A sustainable decline in inflation is likely to encourage the Fed to cut policy rates, although the bank would remain vigilant.
- Fixed income assets may benefit from this progressively slowing inflation.
The US consumer price index (CPI) came in lower than expected in May. Prices rose 3.3% (year-on-year) which was slower than the figure for April. In addition, core CPI, which excludes the volatile food and energy prices, was at its lowest level in more than three years. Following a string of unfavourable numbers in the beginning of the year, both the data point to slowing inflation in the services as well as goods components. While this should be encouraging for the Fed, the central bank has indicated it will need more evidence of inflation falling sustainably towards its 2% target before reducing policy rates. The overall inflation numbers are in line with our expectation of a gradual decline in price pressures. This could be positive for select government bonds and quality credit.
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