Jump in US CPI Set to Test the Fed’s Mettle

By Glenn Dyer | More Articles by Glenn Dyer

Something to chew on for the Fed next week after US consumer prices rose by the most in nearly 13 years in May as pent-up demand combined with higher prices for some goods and services in particular raised concerns about inflation.

But markets didn’t panic choosing to believe the line from the Fed that the rise in costs is transitory, which from the composition of the data in the report, strongly suggests an easing in coming month.

In fact, the yield on the key 10-year US Treasury bond dipped well under 1.50% to end at a three-month low and a long way from the 1.77% peak on March 31.

It seems the bond market still shares the Fed’s faith. The yield on 10-year treasury bonds fell to 1.44% from Wednesday’s close of 1.49%. The yield peaked in trading around 1.533% in the wake of the CPI report. But as economists and traders looked deeper into the report, yields fell.

While the 5% annual rise in the headline CPI and 3.8% annual increase in the core measure will feature at next week’s two-day meeting of the Fed, the readings won’t change the sit and wait policy of the central bank.

Of course if inflation persists at 2% to 3% in a few months’ time, bond markets will be selling off and the faith in the Fed will be severely strained.

The CPI increased 0.6% last month after April’s 0.8% in April, which was the largest gain since June 2009. Food prices rose 0.4%, but petrol fell for a second month in a row. The 5.0% annual rise was the biggest year-on-year increase since August 2008 and followed a 4.2% rise in April.

But the increase was misleading, as was April’s big surge.

Used cars and truck (ute) prices continued to climb higher, rising 7.3% on the month and a massive 29.7% for the past 12 months. The new vehicles index was up 1.6%, its biggest-single month gain since October 2009 and was up 3.3% for the 12-month, the highest move since November 2011.

While, the energy index was down slightly for the month despite the huge rise in petrol prices this year, the food index repeated its April rise of just 0.4%.

The petrol index is up 56.2% over the past year, part of an overall 28.5% increase in energy during the period. Food prices have remained comparatively tame, up 2.2% for the 12-month period.

Consumers paid more for motor vehicle insurance, furniture and bedding, rents as well as apparel. But healthcare costs eased 0.1% as prices for prescription medication fell 0.3%.

Household furnishings and operations rose 1.3%, the biggest month-over-month gain since January 1976. Airline tickets continued their climb, rising 7% for the month and 24% from a year earlier as more passengers take to the skies. Car and truck rentals rose along with sales prices, jumping 12.1% to compound a 16.2% increase in April and rise of 110% from a year ago.

Shelter cost, which make up about one-third of the CPI, rose 0.3% for the month and 2.2% year over year. Within that group, an index that includes hotel and motel costs jumped 10% for the 12-month period.

Most of these are one offs and reflect the base effect from comparisons with ultra-low figures in last week’s pandemic and the recovery in demand for these goods and services.

“The strength in the top line indices was driven largely by categories that have been heavily disrupted by COVID and remain under pressure from supply chain disruptions,” wrote Eric Wingorad, senior economist at investment bank Alliance Bernstein.

“The more persistent categories of inflation — the ones that do a better job of capturing the sustainable trend—are significantly more subdued.

And that’s what the data suggests and what the Fed has been saying for months now.


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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