Highlights:
- All items CPI rose 0.2% month-over-month in May with the year-over-year rate rising to 2.8%. Both were broadly in line with market expectations.
- Gasoline prices rose 1.7% on a month-over-month basis but were up a whopping 22% from a year ago.
- Core (ex-food & energy) prices rose 0.2% from April to push the year-over-year rate up to 2.2% in May from 2.1% the prior month.
Our Take:
As was widely expected, higher energy prices were the main factor pushing the headline year-over-year CPI growth rate up to 2.8% in May from 2.5% in April. The May reading nonetheless marks the fastest pace of annual headline price growth in more than 6 years. Underlying trends also firmed somewhat further. Excluding food & energy components, core price growth ticked up to 2.2% on a year-over-year basis from 2.1% in April. Recent monthly readings have been a little stronger than that. The 6-month rolling average of month-over-month core price changes is tracking closer to 2 1/2% at an annualized rate. Looking through energy volatility, there is still little reason for the Fed to get too worried at this point about inflation coming unhinged on the upside. At the same time, core price growth has continued to firm right around the Fed’s 2% inflation objective. The economic backdrop has clearly continued to improve from very strong levels, and interest rates are still historically low. In short, the data is fully consistent with the Fed continuing to hike rates at a gradual pace — with the next 25 basis point hike almost certainly to come at tomorrow’s FOMC policy announcement.
