CPI: Worst still to come

Summary

The Consumer Price Index increased 1.0% in May, topping consensus expectations for a 0.7% increase and our own forecast for a 0.8% gain. Inflationary pressures were seen nearly everywhere. Energy prices surged, led by a 4.1% increase in gasoline prices, while grocery prices increased 1.4% and pushed the year-ago rate to a pace not seen since the 1970s.

Core goods inflation had shown some signs of slowing over the past few months, but this trend largely reversed course in May. Core goods prices increased 0.7%, led higher by apparel and vehicles. Core services inflation rose at a similar pace and with broad-based drivers including surging airfare prices and solid gains in shelter costs.

Simply put, inflation remains far too high for the Federal Reserve's liking. Until inflation is demonstrably on the downswing, we expect the FOMC to fight back aggressively with tighter policy. Another 50 bps rate hike is all but assured at next week's FOMC meeting, and a couple more 50 bps hikes in July and September seem highly likely.

Across the board pain

The “clear and consistent” progress Fed officials are looking for on inflation remains elusive. The Consumer Price Index rose 1.0% in May, pushing the year-over-year rate to a fresh high of 8.6%. What's more, the worst prints are yet to come by our estimations. We suspect that the formidable momentum in inflation could push the headline rate for CPI close to 9% as early as next month. If that's not bad enough for consumers and the Fed, CPI inflation is likely to stay near those levels through the autumn.

The pushback in timing on “peak” inflation comes amid a further climb in energy prices. Gasoline prices rose 4.1% in May but have since catapulted to just shy of $5 per gallon nationally which points to an even larger monthly gain in June. Utility bills are also on the rise. Costs for energy services (electricity and piped gas) increased 3.0% in May and are likely to climb further amid the steep rise in natural gas prices and still unseasonably-low inventories. Meanwhile, food inflation remains unrelenting. Grocery prices shot up another 1.4%, bringing the one-year rise to 11.9%–a rate unseen since the 1970s. Prices for food away from home did not increase quite as much but were still up a robust 0.7% in May.

Download The Full Economic Indicator