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US Inflation at 8.6% in May, Blows Past Estimates and Hits Highest Level Since 1981

US Inflation at 8.6% in May, Blows Past Estimates and Hits Highest Level Since 1981

Diego Colman, Market Analyst

MAY INFLATION KEY POINTS:

  • May U.S. inflation rises 1% on a seasonally adjusted basis and 8.6% over the last 12 months, well above expectations
  • Core CPI increases 0.6% m-o-m and 6% y-o-y, also above consensus estimates
  • Strong inflationary forces could put pressure on the Fed to increase rates in 50 bps increments well beyond the July meeting

Most Read: What USDJPY Tells US About the EURUSD and S&P 500 Break Downs

Updated at 9:00 am ET

MARKET REACTION TO INFLATION DATA

Immediately after the CPI data crossed the wires, the U.S. dollar gained across the board, pushing the DXY index close to the 104.00 level. The move was driven by a jump in Treasury rates, with the 2-year yield soaring to 2.925%, its highest level since November 2018. Meanwhile, the S&P 500 futures plunged, dropping towards 3,950 as traders began to position for the possibility of a more forceful tightening cycle by the Federal Reserve over the coming months.

US dollar chart

Source: TradingView

Original post at 8:40 am ET

Price pressures remained stubbornly strong last month in the U.S. economy amid soaring energy and food costs, straining household budgets and suggesting that the Federal Reserve has a long way to go to tame inflation and bring it back to the 2% target over the forecast horizon.

According to the U.S. Bureau of Labor Statistics, May headline CPI, which measures a comprehensive basket of goods and services, increased 1% on a seasonally adjusted basis, pushing the annual reading to 8.6% from 8.3% in April, the highest level since 1986, suggesting that inflation did not peak during the first quarter as economists had anticipated and that the battle to combat four-decade high CPI is not yet succeeding. In terms of expectations, analysts surveyed by Bloomberg News had projected this metric to rise 0.7% m-o-m and 8.3% y-o-y.

Focusing on the report's details, the largest contributor to the monthly gain for all-items was energy. This expenditure category surged an eye-popping 3.9% and was responsible singlehandedly for about 45% of May’s topline increase following a temporary reprieve in April. With average prices at the pump setting one record after another in June, the energy component will remain biased to the upside in the near-term, dimming prospects for a material reversal in the headline index any time soon and keeping the Fed on the path of aggressive policy tightening. Food, meanwhile, advanced 1.2% m-o-m, slightly above recent readings, a discouraging sign for low-income Americans who spend a large portion of their income on necessities.

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Excluding food and energy, so called core CPI, which tends to lessen transitory noise and reflect longer-running trends in the economy, shot up 0.6% m-o-m, topping the median estimate by one tenth of a percent. Compared with one year ago, the index grew by 6%, following a 6.2% increase in April, a slow but welcomed directional improvement.

Looking at the core internals, shelter jumped 0.6%, reflecting robust gains in rent and lodging. Transportation, for its part, remained red-hot and spiked 1.3%, pointing to a rotation of household demand toward services consumption. Used cars and trucks stopped its reversal and rose 1.8% on the month.

In the face of persistently elevated inflation, the U.S. central bank may be inclined to maintain a hawkish posture and continue to front-load interest rate increases to move monetary policy to a neutral more expeditiously, a level that neither stimulates no restricts economic activity. Following the May FOMC meeting, the prevailing view was that the Fed would only deliver two additional super-sized hikes (in June and July) and then return to the standard 25 bps adjustment in September, but with unrelenting price pressures, a more forceful tightening roadmap cannot be ruled out.

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---Written by Diego Colman, Market Strategist for DailyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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