Does a Softer CPI Mean the Fed Is About to Pivot? Not So Fast, Says EBC

Traders welcomed May's US inflation data with optimism, interpreting the softer figures as a green light for rate cuts. Markets reacted swiftly: the US Dollar Index (DXY) dipped to 98.6, its lowest since April 2022, while Fed funds futures briefly priced in a 68% chance of a September rate cut. But at EBC, we urge a more cautious reading.

Beneath the headline, inflationary pressures remain embedded. And with new risks entering the picture, the idea of an imminent Fed pivot may be premature.

Headline Versus Core: A Tale of Two Figures

May's headline Consumer Price Index (CPI) rose 2.4% year-on-year, slightly below market expectations of 2.5%, and just 0.1% month-on-month. A 2.6% drop in gasoline prices was the primary driver of this moderation.

However, the more telling figure, core inflation, showed no improvement. Stripping out food and energy, core CPI remained stuck at 2.8% year-on-year. Services, housing and insurance categories all remained firm. Shelter costs alone, which make up more than a third of the CPI basket, rose by 0.3% during the month.

“Markets saw the 0.1% print and cheered, but the Fed's focus is deeper,” said David Barrett, CEO of EBC Financial Group (UK) Ltd. “Sticky services inflation, rising shelter costs, and new tariff risks tell us we're not out of the woods yet. This is not the soft landing — it's just a temporary cloud break.”

Dollar Decline: Supportive or Problematic？

The dollar's recent weakness has helped lift risk assets and emerging market currencies, including those in Asia and Latin America. The DXY has fallen approximately 3% to 4% year to date, helping fuel a broad market rally.

Yet, this is not a clear win for the US economy. A weaker dollar may reduce costs for foreign buyers, but domestically, it raises import prices. With fresh tariffs targeting over $18 billion worth of Chinese goods set to take effect in June, EBC expects pressure to build within core goods categories.

“A weaker dollar reduces import costs for other countries — but raises them right here at home,” Barrett warned. “With tariffs on over $18 billion worth of Chinese goods taking effect in June, we expect potential spillovers into core goods inflation. Markets celebrating now may find themselves repositioning rapidly if CPI re‑accelerates.”

Labour Market and Tariffs Keep the Fed on Alert

Despite recent inflation relief, other macro signals continue to complicate the picture. Unemployment is holding steady at 4.0%, and average hourly earnings are rising at a 3.9% annual pace. This points to continued strength in the labour market, which makes a sudden shift in monetary policy less likely.

At the same time, tariffs on key strategic sectors such as electric vehicles, semiconductors and green energy could create fresh supply chain frictions and drive up costs over the coming months. These dynamics may not be fully reflected in May's CPI, but EBC believes they could show up in the data very soon.

“The June data will be a credibility test,” Barrett added. “If inflation flares while the dollar remains weak and tariffs kick in, the Fed may face conflicting pressures — supporting growth on one hand while holding the inflation line on the other.”

EBC's View: Prepare for Volatility, Not Victory

The current market setup is fragile. Expectations for a dovish Fed have pushed traders into rate-sensitive assets and dollar shorts. But the outlook remains uncertain, and even a modest upside surprise in the June CPI could trigger swift repositioning.

“This is not a time to chase rate cut narratives,” Barrett concluded. “Asymmetric risks are building. Investors should stay nimble, diversify exposure across currencies and sectors, and prepare for renewed volatility. The next data print could be the pivot — or the plot twist.”

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.