CPI Inflation Rate Shock Jolts Fed Policy Outlook; Dow Jones Tumbles

The consumer price index came in hotter than expected in May, as the CPI inflation rate eclipsed March’s 40-year peak.  Following Thursday’s stock market rout, the Dow Jones fell sharply after the CPI report, which shifted Wall Street expectations to half-point Fed rate hikes at the next three or even four meetings.


The CPI rose 1% from the prior month and 8.6% from a year ago, compared to inflation rates of 8.3% in April and 8.5% in March. The core CPI, which strips out volatile food and energy categories, rose 0.6% from April. Still, the annual core inflation rate eased to 6% from the prior month’s 6.2% reading. March’s 6.5% core inflation rate was the highest since August 1982.

Economists expected the overall CPI to rise 0.7% on the month as the annual CPI inflation rate slipped to 8.2%. The core CPI was seen rising 0.5% vs. April and 5.9% from a year ago.

Nonenergy services inflation, which affects 57% of consumer budgets, rose 5.2% from a year ago, topping April’s 30-year high of 5.1%.

Goods prices, excluding food and energy, rose 0.7% on the month, bringing the annual inflation rate down to 8.5% from 9.7% in April.

Economists have been expecting goods prices to recede. However, it will take a significant cooling of services inflation for the Federal Reserve to adjust policy.

The 0.6% monthly rise in the core consumer price index, if sustained, would add up to a 7.2% annual core inflation rate. That compares to Federal Reserve projections of 4.1% core inflation in 2022. If inflation stays on pace to exceed projected Fed levels, policymakers probably will have to tighten further and faster than expected.

Keep in mind that the CPI differs from the Fed’s preferred personal consumption expenditures price index. The latter includes government purchases on behalf of consumers such as by Medicare and Medicaid. It also factors in a substitution effect, when high prices lead consumers to adapt purchasing behavior.

Dow Jones, Treasury Yields Reaction To CPI Inflation Rate

The Dow Jones Industrial Average slid 2.4% in early Friday stock market action. The S&P 500 sank 2.6% and the Nasdaq composite 3.1%.

It remains to be seen whether inflation beginning to come down from its peak can create a sustainable rally. Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the stock market trend and what it means for your trading decisions.

Lately, markets have been in a tug-of-war, with softer economic data boosting hopes for a coming shift in Fed policy. Yet messaging from the Federal Reserve, including chief Jerome Powell’s warning of “pain” ahead, suggests that there’s no reprieve from Fed tightening in sight. Friday’s CPI data surely added weight to the bear case.

The Federal Reserve is expected to raise rates by 50 basis points at next Wednesday’s policy meeting. Another half-point hike has been expected in July. However, after the CPI report, CME Group’s FedWatch page shows overwhelming odds of additional hikes of at least 50 basis points at the June, July and September meetings, with slightly-better-than-even odds of a half-point hike in November. That would bring the Federal Funds target range to 2.75%-3%, up from 0.75%-1% currently.

As of Thursday’s close, the Dow was off 12.3% from its record closing high on Jan. 4. The S&P 500 had fallen 16.2% from its peak, while the Nasdaq composite had tumbled 26.8%.

Following the CPI report, the 10-year Treasury yield rose 7 basis point to 3.10%. The two-year yield popped 14 basis points to 2.96%.

CPI Inflation Report Details

Prices for used cars and trucks jumped 1.8% on the month, and rose 16.1% from a year ago. However, that compares to March’s 35.3% annual gain.

Demand for used cars had gotten a boost amid the global chip shortage that has snagged production for new autos. Prices for new vehicles increased 1% on the month, while rising 12.6% from a year ago. April’s 13.2% annual rise was the biggest yearly increase since 1949.

Energy prices rose 3.9% on the month and increased 34.6% from a year ago. Gasoline prices have set new highs in recent days.

Prices for food away from home rose 0.7% in May vs. April, while rising 7.4% from a year ago. Prices for food consumed at home climbed 1.4% last month and 11.9% from a year ago.

Prices for medical services rose 0.4% on the month, bringing the year-over-year increase to 4%.

Meanwhile, shelter prices rose 0.6% in May, as owners’ equivalent rent rose 0.6%.


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