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May Inflation Soars Past Forecasts To 5%: Core At Fastest Pace Since 1992

Core consumer prices surged to the fastest pace of gains since 1992 in yet another challenge to the Federal Reserve's low-rate policies.

U.S. consumer price inflation increased at the fastest pace in more than a decade again last month, data from the Bureau of Labor Statistics indicated Thursday, with hotter-than-expected headline readings that could challenge the Federal Reserve's low-rate stance as the world's biggest economy continues its post-pandemic recovery.

Headline CPI for the month of May was estimated to have risen 5% from last year, and 0.6% when compared to the April reading, with both tallies coming in well ahead of Wall Street forecasts. So-called core inflation, which strips-out volatile components such as food and energy prices, rose 0.7% on the month and 3.8% on the year, the report noted, the highest since 1992.

"The Fed has never said how big a reopening spike it expected, but we’re guessing that policymakers have been surprised by the past two months’ numbers," said Ian Shepherdson of Pantheon Macroeconomics. "These data will not change their conviction that “transitory” factors and “bottlenecks” are to blame, but they do raise the risk that the loosening of labor supply everyone expects in the fall won’t be enough to dampen wage pressures as much as will be needed, in order to prevent a sustained increase in inflation next year."

"The problem is that the upturn in labor supply probably won’t be visible until September or even later, so investors hoping for a clear steer on future rate policy from Chair (Jerome) Powell at Jackson Hole in August are likely to be disappointed," he added.

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Inflationary pressures have been evident in several sectors of the global economy last month, with China reporting the biggest surge in factory gate prices since 2008 and the most recent JOLTs job openings data showing a record high 9.3 million vacant positions in the U.S. labor market, suggesting employers will need to boost wages even beyond last month's 2% increase to entice people back onto the shop floor.

The Federal Reserve's preferred measure of U.S. inflation surged the most in nearly three decades over the month of April, as well,  as consumer spending got a boost from President Joe Biden's $1.9 trillion American Rescue Plan and supply-chain bottlenecks added to price increases.

The core April PCE Price Index rose 3.1% from last year, the highest since 1992 and 0.7% on the month, the Bureau of Economic Analysis reported, topping Wall Street forecasts and adding to investors concerns about the sticky nature of consumer prices. 

Benchmark 10-year Treasury bond yields rose to 1 basis points 1.516% following release of the data and yesterday's better-than-expected $38 billion auction of new paper, while U.S. equity futures turned modestly higher, with contracts tied to the Dow Jones Industrial Average indicting a 105 point opening bell gain.

Contracts tied to the S&P 500 are indicating a 3 point bump while those linked to the tech-focused Nasdaq looking at a 35 point decline.