Today’s CPI data surprises to the upside … why no one should have been surprised … the impact on the Fed
Well, the “peak inflation” narrative is out the window.
This morning, we learned that the Consumer Price Index (CPI) climbed 8.6% in May from one year ago. That’s the highest inflation rate since December 1981.
April’s CPI came in at 8.3%, which was down from March’s print of 8.5%. That slight dip prompted many in the financial media to declare we had seen peak inflation.
Today’s 8.6% throws cold water on that, topping both March’s reading and the May Dow Jones estimate of 8.3%.
If we exclude food and energy prices (“core CPI”), inflation was up 6%. That’s also higher than the forecast of 5.9%.
Month-over-month, headline CPI was up 1% while core CPI climbed 0.6%. The respective estimates were 0.7% and 0.5%.
Not good, all the way around.
***Back on June 1st, we suggested that today’s CPI number could surprise to the upside due to much higher energy costs
April’s lower CPI number benefited from a decline in the price of oil. Specifically, the price of West Texas Intermediate Crude averaged $101.78 a barrel in April. That was well below March’s average price of $108.50.
However, May’s price-per-barrel shot back up, coming in at nearly $110. Here was our takeaway:
Translation, oil’s climb in May is going to put upward pressure on the next CPI number.
That doesn’t mean the overall CPI number will be higher. But it certainly won’t help.
It didn’t help. But it wasn’t the only driver of today’s red-hot print. All the big categories were up.
Surging shelter, gasoline and food prices all contributed to the increase.
Energy prices broadly rose 3.9% from a month ago, bringing the annual gain to 34.6%. Within the category, fuel oil posted a 16.9% monthly gain, pushing the 12-month surge to 106.7%.
Shelter costs, which account for about a one-third weighting on the CPI, rose 0.6% for the month, the fastest one-month gain since March 2004. The 5.5% 12-month gain is the most since February 1991.
Finally, food costs climbed another 1.2% in May, bringing the year-over-year gain to 10.1%.
One of the most disappointing details of today’s report has to do with used vehicles. This has been closely watched as emblematic of the inflation surge.
For the past three months, the price of used vehicles has been falling, which has helped give life to the “past peak” inflation narrative.
But today’s report shows this category increased 1.8%, which CNBC calls “a potentially ominous sign.” Ominous or not, it does show that it’s premature to claim we’re beyond peak inflation.
***Regular Digest readers likely weren’t surprised by this hotter-than-expected print
Last month, we highlighted work from Richard Curtin. He’s the professor who has directed the widely referenced University of Michigan Consumer Sentiment surveys since 1976.
Given Curtin’s decades of experience with inflation, government policy, and investor sentiment, we view his research with healthy respect. Here’s what Curtin predicted about what we’d see with upcoming inflation reports:
Another critical characteristic of the earlier inflation era was frequent temporary reversals in inflation, only to be followed by new peaks.
That same pattern should be expected in the months ahead.
Given today’s numbers, it’s clear that we are, in fact, seeing this pattern repeat. And this doesn’t bode well for the U.S. consumer, and by extension, the economy.
In a separate release from the Bureau of Labor Statistics, we learned that real wages (adjusted for inflation) fell 0.6% in April. And that’s despite average hourly earnings climbing 0.3%.
As we’ve pointed out in past Digests, this means workers might have more dollars in their paychecks – which enables them to pay all sorts of higher retail prices (fueling inflation). But they’re getting poorer all the while.
Back to Curtin for his prediction on this dynamic:
Prices and wages will continue to spiral upward until the cumulative erosion in inflation-adjusted incomes causes the economy to collapse in recession.
It is like the children’s game of musical chairs: Everyone knows the game will end, but they feel compelled to keep racing around the circle at an ever-faster pace, hoping their forced exit will leave them in the best possible position—even if it still means an inflation-adjusted loss.
***Jumping ahead to next week’s Fed meeting, how will today’s CPI data impact policy?
The next Federal Reserve policy meeting concludes next Wednesday.
The policy announcement itself isn’t likely to surprise anyone. After today’s hideous CPI print, a half-point rate hike is all but certain – and that’s for the July meeting as well.
In fact, given today’s 8.6% number, a third consecutive 50-basis-point hike in September is now far more likely (the Fed doesn’t meet in August).
Until this morning, many talking heads were suggesting September might be a “pause” month for the Fed. Today’s data call that into question.
Back to expectations for next Wednesday’s meeting…
The Fed has just begun its bond roll-off campaign, which has been well-choreographed. So, there shouldn’t be any surprises coming there either.
If fireworks are going to happen, they’ll be based on comments from Federal Reserve Chairman Jay Powell.
Recently, Powell have been moving away from precise language, opting for vaguer territory.
For example, last year and earlier this year, we were hearing more about specific interest-rate targets. Today, however, that’s being replaced by references to “neutral” levels and “restrictive” territory.
You might notice that these levels don’t come with precise definitions. That’s intentional.
But even this is morphing. Powell doesn’t even like using “neutral” today.
At the start of the hiking cycle, Chair Jerome Powell said the goal was “getting rates back up to more neutral levels as quickly as we practicably can.”
In May, however, he walked back from the concept of neutral — a level that neither slows nor speeds up growth — cautioning that the discussion had a “sort of false precision.”
“You know, you’re going to raise rates, and you’re going to be kind of inquiring how that is affecting the economy through financial conditions,” he said.
Translation – “no more specifics, because I want plenty of leeway in the outcome of all this, because we can’t predict what’s going to happen.”
To be fair, Powell’s job is incredibly hard. After all, higher rates impact different parts of the economy far quicker than other parts, which makes broad precision near-impossible (even that description “broad precision” is an oxymoron).
For example, mortgage rates have already skyrocketed. But for a company that’s financing inventory using short-term debt, conditions might appear cheaper.
Tying back to next week, because the Fed’s language will likely remain vague, that leaves room for different interpretations… which leaves room for uncertainty… which Wall Street hates.
So, Powell’s comments are what we’ll be watching. Especially in light of today’s horrendous CPI data.
We’ll keep you up to speed here in the Digest.
Have a good evening,