Inflation Peaking? CPI Suggests Otherwise

The highly anticipated data on consumer prices did little to alleviate inflation concerns. The Bureau of Labor Statistics reported the Consumer Price Index and the Core Consumer Price Index (which strips out food and energy prices) jumped 1% and 0.6%, respectively, in May.  

Both increases were more than expected and put the headline and core indexes up 8.6% and 6%, respectively, muddling the “inflation is peaking” narrative that many investors were clinging to. 

For the headline CPI, the 8.6% increase was its fastest pace of growth since 1981, topping the 8.5% increase seen in March. On the other hand, the core CPI’s 6% increase in May was below the 6.2% seen in April and the 6.5% seen in March. 

While core inflation has fallen for two months in a row, the data contained little evidence that price pressures were abating.  

After two months of declines, used vehicle prices jumped 1.8% month over month (16.1% year over year); shelter prices accelerated to a gain of 0.6% month over month (5.5% year over year); and airline fares surged 12.6% month over month (37.8% year over year). 

Meanwhile, though food and energy prices aren’t included in core CPI, they are arguably the most visible signs of inflation for the average consumer. Food prices climbed 1.2% from April to May and 10.1% year over year—its fastest pace of growth since 1981.  

Energy prices gained 3.9% from April to May and 34.6% on a year-over-year basis, the fastest pace since 2005. 

Monetary Policy Impact  

The data will likely do little to change the Fed’s hawkish monetary policy stance. The immediate reaction in the bond markets included a 20 basis point rally in the two-year Treasury yield to 3.01%, its loftiest level since 2007. 

At the same time, the 10-year Treasury yield gained 11 basis points to 3.15%, flattening the yield curve and pointing toward increasing economic growth concerns within the bond market. 

Bond ETFs have fared poorly this year, with losses of 3.2% for the iShares 1-3 Year Treasury Bond ETF (SHY); 10.6% for the iShares Core US Aggregate Bond ETF (AGG); 11.9% for the iShares 7-10 Year Treasury Bond ETF (IEF); and 23% for the iShares 20 Plus Year Treasury Bond ETF (TLT). 

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