Highest Consumer Price Index in over 40 years puts pressure on Fed

US Economy. Inflation in May was higher than expected and increases the pressure on the Fed to defend its credibility. SEB sticks to its forecast for 50bps hikes in all of the three coming meetings June, July and September. If inflation remains high the Fed may be forced to continue to hike fast for even longer.

In May, price increases gained speed after a more modest April number. Many upside surprises sum up to a somewhat higher core CPI m/m (the given month compared to the previous one) reading (0.63% vs 0.57%). Core goods prices, ex food and energy, continued to accelerate on the back of renewed price increases on used cars and apparel after last month’s decline. Services less energy and rent on shelter added 0.15 percentage points, pp, to the all-items monthly change.

Food prices gain pace

In terms of headline CPI, the surprise was somewhat larger with a 1.0% monthly gain compared with expectations of 0.7%. We had anticipated rising food prices going forward, albeit at a more modest pace. However, in May we saw a 1% gain in food prices. Energy prices, such as fuel and gasoline, together lifted the overall energy component to +3.9% on the month with energy services also moving above 2%. The overall view was that we had left peak inflation behind, but in May the all-item inflation rate came in 0.01pp higher than in March. If oil prices continue to rise rapidly, another peak in headline inflation can no longer be excluded.

Conclusion:?While many of the upside surprises are clearly within a reasonable range of forecasting uncertainty, adding them up suggests a more broad-based and higher inflation environment than generally anticipated.

The Fed has very clearly signaled a 50 basis points hike at this week’s 15 June FOMC meeting and it is unusual that it surprises against the expectations shortly ahead of a meeting. Thus, we do not expect the Fed to shift to an even larger 75bps move now. ?Our forecast of continued 50bps hikes in both July and September gains further support and if inflation remains sticky the Fed may be forced to continue to hike fast for even longer than so. Markets have started to price in a possibility of 75 basis points hikes in one of the coming meetings, beyond June, which is reasonable but not our main scenario.?

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