May CPI Hits 4.2% Y/Y; Core CPI Stays at 5.3%

U.S. consumer prices rose 0.5% in May from a month earlier, matching the consensus call. The Bureau of Labor Statistics released the data Wednesday. The annual headline rate accelerated to 4.2% from 3.8% in April.

Core CPI, which strips out food and energy, advanced 0.4% for the second straight month, also in line with expectations. That left the yearly core rate at 5.3%, up from 5.2%.

The Federal Reserve has repeatedly said it needs sustained evidence of cooling price pressures before considering rate cuts. The May numbers show headline inflation stuck above 3% and core above 5% – levels that give the central bank little reason to pivot soon.

Treasury yields jumped immediately after the print. The 10-year note climbed roughly 7 basis points. The 2-year yield moved up by a similar margin. The yield curve steepened slightly, a sign that traders are pulling forward rate expectations. Before the release, CME FedWatch data showed roughly a 35% probability of a September cut. That probability fell after the CPI landed.

The dollar strengthened across the board. The yen dropped past 140 per dollar, with the U.S.-Japan 10-year yield differential widening by about 7 basis points. The euro slipped as well. The ICE Dollar Index pushed above 103.50, approaching levels last seen in early May.

Gold futures fell about 1% to near $1,940 an ounce. Real yields on 10-year TIPS rose roughly 5 basis points. A combination of a stronger dollar and higher real yields typically weighs on the metal.

Stock futures turned negative. The S&P 500 was set to open lower after a three-day rally. Long-duration sectors such as technology and real estate face valuation headwinds when rates stay elevated. Apple and Microsoft traded lower in pre-market action. Financials and energy stocks, which tend to benefit from a steeper curve and stronger nominal growth, saw more mixed positioning. The immediate reaction was broad-based selling.

The May producer price index releases Thursday. That report gives a read on pipeline cost pressures for the Fed. The central bank's next rate decision comes June 14. Markets now assign a near-zero probability of a move at that meeting.