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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, Contributing Strategist


What's on this page


  • 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

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

Updated at 9:00 am ET


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.

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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.

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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.