May US Core CPI Slightly Exceeded Expectations; Nomura Revises PCE Forecast Up

Overview

This research report provides a detailed breakdown and forward-looking analysis of the May 2026 US CPI data. Although the May core CPI MoM increase (0.208%) was lower than the previous value, it still slightly exceeded Nomura's own expectations. More critically, due to the resilience of service prices and the potential upward push from PPI data, Nomura raised its May core PCE inflation MoM forecast from 0.327% to 0.376%. The report believes that although core goods experienced temporary deflation, slow rent disinflation, sticky service prices, and upstream cost pressures mean overall inflation risks still exist, which supports Nomura's long-term benchmark scenario of the Fed maintaining interest rates unchanged through the end of 2027, and policy risks are gradually tilting towards tightening.

Core views

Core CPI and PCE Forecast Adjustments: May core CPI MoM rose 0.208%, although lower than the market consensus of 0.3%, it was higher than Nomura's prior expectation of 0.183%. Based on this result and the strong performance of relevant PPI sub-segments, Nomura revised its May core PCE inflation MoM forecast up to 0.376% (corresponding to YoY 3.44%), significantly higher than April's 3.29%. This indicates that on the inflation indicator most concerned by the Fed, price pressure has not eased as quickly as surface CPI data suggests. Temporary Deflation in Goods Inflation: May core goods inflation fell 0.11% MoM, turning negative for the first time since May 2025, driven mainly by weakening tariff effects and some one-off factors. For example, IT goods prices softened unexpectedly, and new car price declines also exceeded levels implied by fundamentals. However, the report emphasizes this deflation is likely temporary. Considering global critical material and component shortages, the potential price push from AI investment boom on electronics, and increased production and transport costs, core goods prices are expected to resume gentle growth in the coming months. Housing and Service Sector Inflation Stickiness: Rent disinflation process is very slow. May regular rent and Owner's Equivalent Rent (OER) MoM increases were 0.362% and 0.297% respectively, both higher than Nomura's expectations. Rent fluctuations in some small cities and accelerated OER in the Greater New York area are main disturbance factors, but removing these noise, mid-term rent disinflation will still maintain a gradual pace. On the services side, super core CPI rose 0.273% MoM, medical service prices rebounded strongly, and airfare prices continued to rise, showing broad service price resilience except auto insurance. Monetary Policy Outlook: Although the moderation of May core goods inflation is a positive signal, the expected acceleration of core PCE and the rise in commodity prices will keep decision-makers alert to inflation risks. Nomura maintains its baseline forecast that the Fed will not adjust interest rates before the end of 2027, and explicitly states that the current risk balance leans towards policy tightening rather than easing.

Analysis framework

The report adopted a 'CPI-PCE Mapping Bridge' analytical method. Since the Fed focuses on PCE while the market sees CPI first, analysts correct forecasts by identifying differences in weights and data sources between the two indicators. For example, car insurance price drops in CPI do not affect PCE (the latter uses PPI data), while portfolio management fees and domestic airfare prices in PPI are used to estimate potential upside pressure on PCE service segments. Additionally, the report applied structural decomposition methods to strip out noise. In analyzing rents, large cities and small cities are observed separately to identify that abnormal fluctuations in small cities are short-term disturbances; in analyzing goods, tariff-sensitive goods and non-tariff goods are distinguished, combined with supply-side fundamentals such as semiconductor shortages to judge the sustainability of price trends, thereby avoiding being misled by surface ups and downs of monthly data.

Methodology notes

• Macroeconomic framework

  Mapping of Data Source Differences between CPI and PCE

  Although both CPI and PCE measure inflation, the data sources for some segments differ. For example, car insurance comes from consumer surveys in CPI, but from PPI in PCE; financial service prices in PCE refer more to PPI. Analysts use this difference, combined with released CPI and upcoming PPI data, to calibrate forecasts for core PCE early on, which is a key technical step in understanding the Fed's perspective.

• Industry/Industrial Analysis FrameworkPrice-Volume Decomposition

  Urban Structure Decomposition of Rent Inflation

  National rent data may mask local anomalies. By splitting samples into large and small cities, it can be found that high volatility in small cities is often short-term noise, while trends in large cities better represent long-term directions. This method helps determine if rent disinflation is structurally slowing down or temporarily disturbed.

• Cycle and Prosperity FrameworkSupply-demand framework

  Dominance of Supply Side Constraints on Goods Prices

  When analyzing technology products and durable goods prices, one cannot only look at current demand or tariff impacts, but also pay attention to supply factors such as upstream semiconductor shortages and capacity crowding caused by AI capex. When supply constraints become the main contradiction, short-term price weakness is often unsustainable; once demand rebounds or cost transmission becomes smooth, prices will rebound rapidly.

Key data

• May Core CPI MoM+0.208%Higher than Nomura's expectation (+0.183%), lower than market consensus (+0.3%)
• May Core PCE MoM Forecast+0.376%Revised up from forecast before CPI release (0.327%), corresponding to YoY 3.44%
• May Core Goods CPI MoM-0.11%Turned negative for first time since May 2025, but viewed as temporary phenomenon
• May Regular Rent MoM+0.362%Higher than Nomura's expected +0.21%, small city fluctuations are large
• May Super Core CPI MoM+0.273%Higher than expected +0.247%, service inflation remains resilient
• Fed Interest Rate Path ForecastUnchanged through end of 2027Risks lean towards tightening, despite short-term moderation in goods inflation

Impact & implications

For bond markets and rate trading, this report sent a hawkier signal than surface CPI data. Although the fall in core CPI MoM appears favorable, the revision up in core PCE means the Fed is still far from the 2% inflation target, and the rate cut window has not opened in the short term. Investors should beware of the market's overly optimistic interpretation of the 'inflation cooling' narrative; long-end US treasury yields may gain support due to confirmation of PCE data. For equity markets, the stickiness of service inflation and potential recovery in goods costs may compress corporate profit margins, especially those consumer companies that cannot fully pass on costs; meanwhile, medical services, aviation, and financial asset management departments with pricing power may maintain earnings resilience in an inflationary environment.

Risks

• Core PCE inflation may be further revised up due to strong PPI data
• Global critical materials and components shortage may cause core goods prices to rebound faster than expected
• Rent disinflation process may stagnate or even reverse due to specific city supply-demand imbalance
• Rise in commodity prices may reignite overall inflation expectations
• If inflation remains sticky, Fed policy stance may shift from wait-and-see to tightening

What to watch

• Upcoming May PPI data, particularly domestic airfare and portfolio management service segments
• Whether small city rent inflation returns to normal in subsequent months
• Whether divergence between used car market prices and CPI new car prices converges
• Consumer sensitivity changes to high prices and retail spending data
• Public statements from Fed officials on core PCE revision up and temporary nature of goods deflation