New CPI, Who Dis? Stock Market Refuses to Take the Inflation Bait

Core inflation rises at fastest annual pace in nearly 30 years…
Wall Street shakes off hot data…
Jobless claims fall to new pandemic low…

Inflation pressures are running hot as the U.S. economy continues to reopen.

The Labor Department released the Consumer Price Index for May today, which came in hotter than expected.

The headline CPI rose 0.6% from April vs 0.5% expected and was up 5.0% year-over-year vs economists’ forecast for 4.7%.

That was the strongest annual gain since August 2008, just before the financial crisis.

The Core CPI was also higher than expected with a monthly increase of 0.7% and an annual gain of 3.8% vs 3.5% forecast.

The core price change was the fastest pace since May of 1992.

Both numbers are sharply higher than the Fed’s target for 2.0% annual inflation but the Central Bank is continuing to dismiss the evidence of inflation bubbling over.

Table of Contents

1 Breaking Down the Numbers
2 Market Reaction
3 Jobless Claims Continue Slow Rebound
4 Federal Reserve Response
5 One Platform. One System. Every Tool

Breaking Down the Numbers

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One-third of the increase in the headline number was driven by prices for used cars and trucks which jumped 7.3% monthly and 29.5% year-over-year.

Those prices have been inflated as demand rises for used vehicles amid a global chip shortage squeezing production of new cars.

But new car prices were still up 1.6% for the month, the largest monthly gain since October 2009, and 3.3% year-over-year which is the strongest annual change since November 2011.

Prices in the energy sector were flat for the month but jumped 28.5% annually led by gas prices which surged 56.2% compared to May 2020.

That steep annual change is due to the extremely low gas prices seen in the beginning of the pandemic as demand plunged due to stay-at-home orders across the country last year.

On a monthly basis, gas prices actually fell 0.7% compared to April.

Food prices continued to rise with food away from home up 4.0% annually as more restaurants reopen.

Apparel prices were up 5.6% year-over-year, while shelter prices rose 2.2%, and prices for transportation services jumped 11.2%.

Market Reaction

Wall Street seemed to shake off the hot inflation data with the S&P 500 notching a new intraday record in early trade.

Analysts say that response is likely because the sectors which saw the hottest increase in prices were those most impacted by COVID-19 in 2020.

Eric Wingorad, senior economist at Alliance Bernstein, told CNBC that trend supports the Fed’s view that current inflation pressures are temporary.

“The details of today’s print continue to support the idea that the spike in inflation is transitory even if it is more intense than most forecasters (myself included) would originally have anticipated,” said Wingorad.

But recent changes by several companies in the U.S. pushes back on the claim that the price increases are only temporary.

This week, Chipotle hiked its menu prices by up to 4% at its U.S. restaurants to cover the costs of a recent wage increase for its workers.

Several other restaurants are also raising pay for their workers as the economy struggles with a a labor shortage.

McDonald’s announced a similar wage increase in mid-May, raising base wages for 36,500 employees by an average of 10%.

But several industries are also struggling with supply shortages and rising supply costs as the U.S. economy reopens faster than global trading partners.

Other companies raising prices or planning to do so later this year include General Mills, Kimberly-Clark, Procter & Gamble, and Coca-Cola.

Speaking at a recent investor conference, General Mills’ CEO Jeff Harmening said, “The inflation pressure we’re seeing is significant. It’s probably higher than we’ve seen in the last decade.”

Jobless Claims Continue Slow Rebound

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The Labor Department also released an update on unemployment today with weekly jobless claims falling to a new pandemic-era low of 376,000, down 9,000 from the previous week.

That was the sixth week in a row of declining first-time claims but was higher than economists’ expectations for 370,000.

Continuing claims also fell sharply, decreasing by 258,000 and falling just below 3.5 million in the week ending May 29.

Pennsylvania and California saw the largest decrease in claims last week, falling by 23,703 and 18,999 respectfully.

U.S. employers have been struggling with a shortage of workers that’s been partly blamed on the federal government’s expanded unemployment benefits.

So far, 25 governors across the country have pulled their states out of that program early in a bid to push workers back into the labor market.

Residents in Alaska, Iowa, Missouri, and Mississippi will be the first to see that change with benefits officially ending this Saturday, June 12.

Some states, like Connecticut and Colorado, are choosing to keep the extra $300 weekly benefit in place while paying workers to get a job.

Colorado is using excess funds provided by the latest stimulus package to pay residents a $1,600 bonus to go back to work.

That state says 7,953 people applied for the “Colorado Jumpstart” program in the first three weeks.

The expanded unemployment benefits are also threatening to create wage inflation in the economy as more businesses are forced to raise wages to attract workers.

The May jobs report showed a 2% year-over-year increase in average hourly wages for the month.

Federal Reserve Response

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The Fed will hold its next policy meeting next week, June 15-16.

And although Central Bank officials have started to lay the groundwork for talk about tapering their asset purchases, no changes are expected to be made yet.

The bank is expected to make the case that the latest increase in inflation, although high, is still transitory.

A continued slow recovery in the labor market gives them more room to remain dovish, as the U.S. economy remains just under 8 million jobs short of pre-pandemic levels.

Even if the bank begins winding down its balance sheet soon, a rate hike is likely to come later.

The Fed has forecast inflation will be 2.4% by the end of this year, 2.0% in 2022, and 2.3% in 2023.

That puts the U.S. economy on track for a longer-run inflation rate of 2.0%.

The Central Bank shifted its focus to “longer-run” inflation while prioritizing recovery in the labor market in 2020.