Merk Investments: Consumer Price Index
The May consumer price index saw headline inflation rise above market expectations and the core arrive right on target. The headline advanced 0.6% m/m and 4.2% y/y, while the core increased 0.2% and 2.3% over that same interval. The headline number for the month taken out four decimal points actually increased 0.6498%, which under the conventions used at the Labor Department can be classified as a near miss on a 0.7%. Driving headline inflation were the 5.7% m/m and 20.8% y/y increase in the cost of gasoline and the 5.1% annualized rise in the cost of food. Overall the cost of transportation rose 2.0% m/m and 8.1% y/y.
Inside the data, the ex food category was up 0.7% m/m and 4.0% y/y. Ex-energy prices climbed 0.2% and 2.7%, while services rose 0.5% and 3.5% over that same time frame. Housing rose 0.5% and 3.3%, the owners equivalent rent subcomponent climbed 0.1% and 2.6%, while the fuel and utilities indicator climbed 2.4% and 10.7%. Medical care increased 0.2% and 4.1% and the price of commodities increased 0.9% and 5.1%.
The searing rise in the cost of transportation, which was responsible for more than a third of rise in overall costs for the month, is a very vivid example of the heartburn that stimulated the hawkish turn in rhetoric from global central banks over the last fortnight. This turn, if somewhat dubious on the part of the Fed from our point of view, over the long term is a healthy sign that the central bankers have become acutely aware of the risk to global economic stability that the current rise in inflation poses.
The primary question left outstanding, is when will those headline increases begin to visibly show up in the core. Right now, what has mitigated a much sharper rise in core prices, which by the way at 2.3% on an annualized basis is well above the implied target range at the Fed, is the muted rise in the housing component over the past few months. Moreover, firms that have had to adjust to a decelerating economy have only partially passed through the tough rise in headline costs to the consumer. It is our assessment that over the remainder of the year that firms will reach a breaking point with respect to the amount of pain that can be absorbed vis-à-vis already razor thin profit margins and begin to pass along those costs. The question, is will the Fed actually follow through on its recent hawkish turn and trigger a recession to combat inflation or will the market call its bluff? Whether it be the September meeting or the December meeting of the FOMC, the market and the Fed are headed for a confrontation.
Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy
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