U.S. All-items Inflation Jumps to 4.2% in May; Core Rate at 2.3%
U.S. All-items Inflation Jumps to 4.2% in May; Core Rate at 2.3%
The consumer price report for May showed a solid increase in prices with the all-items index registering a 0.6% monthly rise, beating market expectations for a 0.5% gain. The year-over-year rate rose to 4.2%, higher than the 3.9% expected. Excluding food and energy, the index increased by an as-expected 0.2% and the year-over-year core rate held steady at 2.3%.
Overall consumer prices were pressured higher in May by a 4.4% jump in energy prices as gasoline prices jumped 5.7%. Energy prices were 17.4% higher than in May 2007. Food prices rose 0.3%, much slower than the strong 0.9% gain recorded in April. Relative to a year ago, food prices are up 5.1%. Core prices were up 0.2% with a boost coming housing costs as fuel/utilities prices rose 2.4% while owners’ equivalent rent posted a 0.1% increase, slower than the 0.2% gain in April and May. Airline fares jumped 3.2% and were 14.4% higher than a year earlier. The report showed declines in the prices for new/used vehicles (-0.1%), apparel (-0.3%) and prescription drugs (-0.7%).
Central bankers have been talking tougher on inflation recently, leading the market to price in a U.S. rate hike as early as late summer. Today’s data highlight that elevated energy and food prices are propping up prices for U.S. consumers and that even the underlying core inflation rate remains within what is considered the Fed’s comfort zone.
More worrying for policymakers is the recent pick-up in inflation expectations evident in the University of Michigan’s consumer survey, in which the one-year inflation forecast hit a new cycle high in May, while the less volatile five-year forecast also rose.
The market will likely remain primed for a rate hike, especially given tentative signs that the economy is regaining some momentum with yesterday’s retail sales report showing an unexpectedly large increase. However, with the unemployment rate having jumped to 5.5% in May and the economy continuing to grow at a sub-potential pace, the Fed is likely to remain on the sidelines in the near-term as policymakers gauge the true momentum in the economy and closely monitor expectations.
RBC Financial Group
http://www.rbc.com
The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.
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