Investors view the May report as one that could shape expectations for the Federal Reserve's policy path in the near term
Updated with fresh report insights, market reaction, and analyst commentary.
U.S. consumer price inflation accelerated in May, with headline readings coming in ahead of expectations, a Bureau of Labor Statistics report released Wednesday showed. The core reading that strips off food and energy, however, remained relatively benign. Following the inflation report, equity index futures trimmed their losses, and the dollar pared its gains.
How Numbers Stacked Up Against Expectations:
- The May monthly rate of CPI inflation at 0.5%, slower than 0.6% in April; Consensus 0.5%
- The core CPI at 0.2% vs. 0.4% in the previous month; Consensus 0.3%
- The annual CPI rate accelerated to 4.2% from 3.8%; Consensus 4.2%; This marked the fastest pace of increase in three years (since April 2023)
- Core consumer prices climbed 2.9% year over year (YoY) from 2.8% in April; Consensus +2.9%
Annual CPI Rate
Source: BLS
Gasoline prices continued to surge, rising 7% month over month (MoM) in May vs. 5.4% in April and accounting for the bulk of increase in energy commodity prices and the headline CPI.
The nationwide average regular grade gasoline prices were $4.48 per gallon in May, up 9.2% from April, and 42.2% higher than in the year-ago period. The oil supply shock that resulted from the U.S.-Iran war has pushed up energy sharply higher since the onset of the crisis in late February.
Medical care services costs accelerated to 0.5% from unchanged prices in the previous month. Meanwhile, the rise in shelter costs decelerated to a monthly rate of 0.3% from 0.6% in the previous month. The annual rate was 3.3%.
Most other components witnessed a let up in pricing pressure. food (+0.2% vs. +0.5%); energy services (+0.4% vs. +1.6%).
Implications for Interest Rates
The May CPI print is the last of the key economic reports that the market and policymakers get to digest before the Federal Reserve's rate-setting committee meets under the new Chair Kevin Warsh next week.
LPL Financial Chief Economist Jeffrey Roach sees the possibility of rate expectations further upended if the Middle East crisis lasts throughout the summer. As far as implications for rates are concerned, the report cements the case for a pause at next week's meeting, while also removing any bias toward additional easing, he added.
The futures market has priced in a 96.2% odds of a status stance stance at the June 16-17 Federal Open Market Committee (FOMC) meeting, according to the CME FedWatch Tool. The May jobs report released last Friday that showed much stronger-than-expected job gains has forced the markets to reprice their rate expectations. The market has begun discounting rate hikes before the year end. That said, the mixed inflation print has reduced the probability of.a December rate hike to 56.1% from nearly 78%.
Economists Diverge
The relatively benign core reading suggests limited spillover in May, according to economist and former PIMO CEO Mohamed El-Erian. However, SoFi Chief Investment Strategist Liz Thomas pointed out that the super core inflation that measures services inflation, excluding housing, did not budge for years on monthly basis, but has been accelerating on a YoY basis.
Thomas also underscored the increase in inflation breadth. "The share of CPI items with annualized inflation of 4% or more rose again in May. Not to the level of what we saw in 2022-24, but moving in the wrong direction," the strategist said.
Source: Bloomberg accessed via Thomas' X handle
LPL's Roach expressed comfort at the core inflation not breaching the psychological level. He also looked ahead into the potential impact of an prolonged Strait of Hormuz disruption. " If the Strait of Hormuz remains disrupted through the Labor Day weekend, we would expect the energy shock to affect additional sectors and heighten uncertainty about the future path of monetary policy," the economist said.