CPI: US inflation rose 1.0% in May, well above expectations

The US Consumer Price Index (CPI) rose 1.0% in May compared to April, according to data released Friday (10) by the US Department of Labor.

Compared to April 2021, the increase was 8.6% (the worst result in 12 months since December 1981). Core inflation, which excludes food and energy (where their prices are more volatile), rose 0.6% month-on-month and 6.0% year-on-year.

The data came in much higher than the market had expected, with estimates for a 0.7% rise in monthly inflation and 0.5% for the core, according to the Refinitiv consensus. On an annual basis, expectations were 8.3% for the “complete” index and 5.9% for the core index.

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Rising prices in the US is the main point of interest for the markets because the Federal Reserve (the Federal Reserve, the US central bank) is raising interest rates and cutting its balance sheet to try to contain the price escalation.

After the release of the index, short-term yields on US Treasuries rose (to 2.908%, up 0.091 percentage points), and New York futures indices were negative (Dow Jones futures fell 0.85%, S&P 500 futures, 1.06%.; and Nasdaq futures 1.48%).

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The result was also Much higher than the April high of 0.3%when inflation had already taken the market by surprise, which could spark investor fears that the Federal Reserve will need to raise interest rates more than the market currently expects to combat inflation.

The US Commerce Department says the price increase in May was broad-based, with housing, gas and food indicators being the biggest contributors to inflation. Energy prices are up 3.9% month over month, after falling in April, and gasoline is up 4.1%. Food rose 1.2% and food at home 1.4%.

“While nearly all major components increased over the course of the month, the largest contributor was housing rates; airline tickets; used cars and trucks, and new vehicles,” says the Commerce Department.

Energy rises 34% in one year

The 8.6% annual rise in CPI (in the twelve months ending in May) is the highest for the index since December 1981. Core inflation (excluding food and energy) rose slightly lower (6.0%).

Among the most volatile, energy prices rose 34.6% in 12 months, the highest since September 2005, led by gasoline (+48.7%) and fuel oil (+106.7%). On the other hand, food inflation rose by 10.1% in one year, and for the first time since March 1981 reached double levels.

Far from the peak?

For Economist Ettore Sanchez, the CPI for May shows that US inflation has not yet reached its peak and should continue to rise. The most notable surprise, he says, was that the 12-month rally accelerated from 8.3% in April to 8.6% – above his more pessimistic 8.5% forecast. “The theory that inflation has already peaked is losing steam.”

Sanchez says the price hikes have been focused on food and energy, but the impact on cores hasn’t been negligible either. Although core inflation slowed from 6.2% to 6.0% y/y, the pace of decline was slower than most of the market had expected (average forecast was 5.9%).

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