The headline consumer price index (CPI) rose 0.2% (month-on-month) in May, right in line with market expectations. That took inflation to a six-year high of 2.8% on a year-on-year basis.
As in April, gasoline (+1.7% m/m) and shelter (+0.3%) were the key forces taking prices higher. Meanwhile, food prices were flat in May.
Core inflation was up 0.2% on the month, also in line with expectations. That lifted the year-on-year pace of to 2.2%, up from 2.1% in April. Firmer prices for core services (+0.3% m/m) were behind the increase, as core goods prices continued to be a drag (-0.1% m/m). Inflation for core services is now back up at 3% year/year, nearing the pace of inflation before idiosyncratic price declines (cell phone contracts) hit services inflation.
Delving further into the details, prices rose for all types of shelter: rent (+0.3% m/m), owners’ equivalent rent (+0.2% m/m) and lodging away from home (+2.9%). Prices were also up for medical care (+0.2% m/m), new vehicles (+0.3%) motor vehicle insurance (+0.4%). Leaning against this were lower prices for household furnishings and operations (-0.4%), used cars and trucks (-0.9%), airline fares (-1.9%). Prices for apparel and recreation were unchanged.
Key Implications
May’s inflation data is bound to turn some heads with its eye-catching headline. However, the upward momentum in core inflation is right in line with what we have long been expecting. Core inflation should continue to rise in the coming quarters as a strong economy and wage pressures see price hikes percolate through the economy.
We don’t see anything in today’s report to alter our view of continued gradual rate hikes by the Federal Reserve. A 25-basis point hike at tomorrow’s FOMC meeting looked like a done deal even before the May inflation report. All eyes will be on the Fed’s updated economic outlook released alongside the statement, and all ears will be turned to Chair Powell’s press conference at 2:30pm Wednesday. Stay tuned.
