U.S. Economic Brief || Headline CPI accelerates in May as inflationary pressures remain broad-based

Headline CPI accelerates in May as inflationary pressures remain broad-based

*The headline U.S. Consumer Price Index (CPI) accelerated in May rising 1% m/m, lifting the yr/yr increase to a four-decade high of 8.6%. May’s above consensus m/m print reflects sharp increases in gasoline and fuel costs, accelerating services inflation with the shelter component in particular gathering additional momentum, and broad-based price gains across food and durable goods categories. With core CPI (excluding food and energy) increasing 0.6% m/m on the heels of a 0.6% increase in April, and inflationary pressures showing little signs of easing through June thus far, May’s CPI print raises the probability the Fed hikes rates by 50bp in September, with a “pause” looking increasingly unlikely.

*Food and energy prices surged over the month, partly reflecting disruptions related to Russia’s invasion of Ukraine which raised crude oil prices, restricted refined energy commodity supplies, and boosted fertilizer costs (Chart 2). Energy prices jumped 3.9% in May, more than offsetting the 2.7% decline in April reflecting a 4.1% increase in domestic gasoline prices and a 1.3% increase in electricity costs. Retail gasoline prices rebounded following a mild slump in April and have continued to hit new all-time highs through early June, which together with the increase in crude oil prices tilts inflation risks for June to the upside. Food prices increased 1.2% in May and have increased 5.5% in the last six months, and price increases will likely continue as the lagged impact of increases in agricultural commodity, fertilizer, and transportation costs filter through into prices at the retail level.

*Goods inflation reaccelerated in May, underpinned by a 1% m/m increase in new vehicle prices and a sharp reversal in used vehicle prices which rose 1.8% following a 0.4% decline in April (Chart 3). Limited auto inventories at the retail level and ongoing supply disruptions will likely keep vehicle prices elevated in coming months, elongating any declines in core inflation on both a yr/yr and m/m basis.

*Core services inflation (excluding energy) continues to accelerate, increasing 0.6% m/m and 5.2% yr/yr, consistent with the ongoing shift in the mix of consumption from goods to services (Chart 4). Medical care services prices increased 0.4% m/m, lifting the three-month annualized increase to 6.5%, while transportation services prices increased 1.3% m/m buoyed by a 12.6% jump in airfares that largely reflects the surge in jet fuel costs and robust, pent-up demand for travel.

*Shelter costs, which account for over one-third of headline CPI and 40% of core CPI, accelerated rising 0.6% m/m reflecting the lagged impact of the rise in market rents and home prices over the last 16 months. Shelter costs have jumped 6.7% on a three-month annualized basis, with rent increasing 6.7% and owners’ equivalent rent (OER) increasing 6.1% (Chart 5). Given the long lags embedded in calculations of rent and OER inflation together with sustained increases in market rents, we expect shelter inflation will remain elevated through mid-2023 at least, which together with an acceleration in services inflation will likely offer little respite on sequential m/m core inflation prints through 2022 (“OER, services prices, and inflation”, January 2022) .

*The jump in food and energy costs over the last six months is straining the budgets and real purchasing power of low-middle income households and will likely prompt further cuts to discretionary spending by particularly vulnerable households. Surging inflation has also hit measures of consumer sentiment, with the University of Michigan’s Consumer Sentiment Index falling to a record low (Chart 6). Moreover, measures of household inflationary expectations are increasing, with year ahead expectations increasing to 5.4% and 5-year ahead expectations increasing to 3.3% (the highest level since 2008) according to the University of Michigan (Chart 7). This upward drift in household gauges of inflationary expectations in response to elevated realized inflation raises the probability of even more aggressive Fed rate hikes to tamp down on inflationary expectations.

Chart 1. Headline CPI and Core CPI (ex. Food and Energy)

Chart 2. Energy and Food Prices (6-month % change)

Chart 3. Used Vehicle and New Vehicle Prices (yr/yr % change)

Chart 4. Core Services (ex. Energy) Prices

Chart 5. Owners’ Equivalent Rent and Rent of Primary Residences (yr/yr % change)

Chart 6. University of Michigan Consumer Sentiment

Chart 7. 1-Year Ahead and 5-Year Ahead Inflation Expectations

Mickey Levy, [email protected]

Mahmoud Abu Ghzalah, [email protected]

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