Consumer prices in the US accelerated more rapidly than expected in May, crucial data out Friday showed.
Headline CPI rose 8.6% YoY, well ahead of the 8.3% economists projected (figure below). Core prices rose 6%, also more than anticipated.
The numbers marked a bitter disappointment for the “peak inflation” camp and fanned fears of a more aggressive policy response from the Fed.
I’d be remiss not to note that the risks for May’s report where skewed decisively to the upside. It was never clear to me (and I tried to make this explicit on several occasions) why consensus wasn’t more cautious.
Fed officials are intently focused on the monthly prints, and they too were hot. The headline gauge posted a 1% MoM gain, far hotter than the 0.7% consensus expected, and among the hottest sequential readings of the pandemic-era inflation crisis.
Core prices rose 0.63% MoM, matching April’s monthly increase on a rounded basis, but well higher if you take the unrounded numbers (figure below).
Do note: The monthly core inflation prints are accelerating, not cooling. Policymakers, including Lael Brainard, have repeatedly emphasized that the monthly readings need to come down for the Fed to even think about adopting a more conciliatory stance.
A look under the hood suggested May’s report was the worst yet for the US economy. I don’t think that’s an exaggeration. Every major category rose from April.
Food at home prices jumped 1.4%, the fifth consecutive monthly gain of 1% or more. On an 12-month basis, grocery prices rose almost 12%, the most since 1979. Five of six major grocery store food group indexes increased more than 10%.
Overall, the food gauge rose 1.2% from April last month. With the exception of the noise around the initial pandemic lockdowns, it was the second-hottest MoM increase in food prices since 1984.
I want to emphasize: Those are monthly readings. And the trajectory — the unabated character of the increases — is wholly untenable. The chart (above) makes that abundantly clear.
Predictably, the energy gauge erased the entirety of April’s monthly decline. The gasoline index rose 4.1% MoM, the natural gas gauge more than 8%. Electricity prices rose 1.3%.
The monthly surge in piped gas was among the largest on record in data back to 1952 (figure above).
The 12-month increase on the fuel oil gauge was 106.7%. There’s no comparable print. The data goes back 87 years. Similarly, 12-month readings on the gasoline, electricity and natural gas gauges were eye-watering, at 49%, 12% and 30%, respectively.
There was no shelter to be had in… well, in the shelter gauge. It rose 0.6% MoM, the largest monthly gain in more than 18 years. The figure (below) suggests the “catch up” effect hasn’t yet run its course.
12-month readings on both key gauges are now above 5%. I’d note that the YoY pace of increases on the Case-Shiller 20-City home index reaccelerated after slowing, which doesn’t bode well for shelter inflation going forward. It responds on a lag.
Insult to injury: Used vehicle prices, a closely-watched pandemic index, rose 1.8% MoM, the first increase since January.
There was no respite in any category. May’s CPI report was, at the risk of lapsing into hyperbole, an unmitigated disaster. “Inflation is back on the highs and critically, it’s across the board,” SPI Asset Management’s Stephen Innes said.
“Demand continues to outpace the supply capacity of the US economy and with supply factors showing little sign of near-term improvement, the onus is on the Fed to dampen the demand side of the equation with ongoing rate hikes,” ING’s James Knightley wrote.
For now, anyway, you can forget about any “Bostic pause” in September. If anything, this report has the potential to make 50bps at that meeting a lock, at least in the market’s eyes.
Even though I expected this, WOW and OUCH
Lets see if Jerome Powell has the mettle to do a Volcker. Its a long drawn out recession or a sharp deep shock ( and recovery)
Just from watching the real action vs. the noise from the Fed, I am not convinced of the mettle.
More than a problem of mettle. In the Volcker era politics, while present, was not nearly as corrosive as it is right now. The midterms are coming soon and the GOP can’t wait to take over and waste two years doing nothing but reducing women’s rights, taking over our schools, and holding more hearings about the big steal, Biden’s kid’s computer and Hillary’s handling of Bengazi. Anything that changes the political landscape like a sudden deep recession will doom us for years.
I view these inflation metrics as a factor of the Fed’s delayed response to inflation. Of course prices continue to go up, they haven’t even begun liquidating debt yet. They have barely raised rates and it’s going to take months for any market to react to those changes. High inflation is going to have been around for a year by the time any of the Fed response finally starts to correct it. By that point it’ll be in the double digit increase range and no matter what the January 6 commission reveals, voters are going to oust the Democrats over this stuff. This really is setting up to be an awful decade.
Yeah, regardless of Democratic culpability on this issue, there is a good chance Republicans will control all three branches for the second half of the 2020s. Betting markets still seem to think democrats have a slightly less than even chance at maintaining the presidency, but the narrative will have to change in a hurry if they want to hold on to at least one branch of government. Let’s just hope enough of the Trump lackeys who are willing to overturn elections lose, so we can maintain some semblance of democracy going into the 2030s.
hopefully the Biden administration is realizing their best strategy for inflation and other issues involves a Ukrainian victory / Putin defeat…
Agreed
I thought folks clamoring for larger and faster rate hikes were insane, now I must join the choir of the mad, the Fed should go 75 bps or even 100 next week, bring demand to a total halt, let’s take our medicine now while we still have a nation, a hard landing is inevitable so let’s get it over with.
Yes, Evil One. Many Calvinist theologins and Austrian School thinkers would certainly agree.
But sadly there is that pesky 50+% of the population that might beg to differ.
The JOLTS data lags a month. 6/1 release was for April.
Some measures of online job listings shows a marked – in some industries a “rapid” – decline during May and start of June.
If those online job listings measures for May are a preview of 7/1 JOLTS release, and if online data for June previews 8/1 JOLTS data, then over the next month or so, data will show that job openings have rolled over and are heading down to pre-pandemic levels.
There would still be a jobs-to-jobseeker gap, unless labor force grows.
But disappearing employment market slack means the Fed is running out of “free tigjtening” room – soon, tightening will cost in unemployment and then the recession inarguably starts.
If inflation is still “hot” in two months, I think odds are substantial (>50%) that the “Fed Tightening Into a Recession” situation will be seen as about to start, if not underway.
Since the only thing that gives this market the occasional excuse for bear market rallies is the hope that Fed tightening is, for whatever reason, close to pausing, easing, or ending, the FTIR is going to be bad. For stocks.
If I remember correctly when the GFC started I think Bernake lowered the interest rates from 3% to 0% and started buying mortgages. It should be clear to the Fed if the Fed doesn’t want to see 10% inflation, they need to shock the economy by stopping all purchases next meeting and raising the interest rate to 3%. I was always told that $4.00 gas per gallon guaranteed a recession so it is clear that we are probably already in a recession.
I am a contractor and so I get calls from recruiters everyday, I am noticing fewer calls and the calls I am getting are for opportunities 20% to 30% less than last month, I know it’s anecdotal but just my two cents.
Allowing more immigrants into the u.s. would go a long way towards eliminating the shortage of workers, as well as improving the long-term prospects of the economy. our horrible demographics can only be improved by bringing in a working-age cohort.