Inflation Running Hot From Food and Energy

Headline Inflation Jumps, Core Inflation Cools

Headline inflation in May rose 8.6% from a year ago, accelerating from April’s 8.3% to the highest year-over-year growth rate. As mentioned in our recent communication, The Feds Response To A Tight Labor Market, Consumer Price Index (CPI) data was released on Friday, June 10th and it rose to the highest year-over-year increase since December 1981.

The spike in consumer prices were fairly broad-based however prices were most noticeable in gas and groceries. “Higher food costs will especially hit lower income consumers with another 1.4% increase in food prices from just one month ago,” warned LPL Chief Economist Jeffrey Roach. Dairy prices rose 2.9% month-over-month, the largest monthly increase since July 2007. A moderation in food prices will not likely come to fruition until geopolitical risks subside and sanctions expire.
Some good news was the core rate (excluding food and energy) fell to 6.0% from 6.2%, a four month low.

Airline tickets jumped another 12.6% after gaining 18.6% last month, as airlines deal with pilot shortages and high fuel costs. As consumers pivot to more services spending, travel-related consumer prices will likely take a longer time to moderate relative to goods prices.

Policy Makers Inclined To Hike Rates
The Fed is widely expected to raise rates by 50 basis points next week and will likely raise rates another 50 basis points in July based on the recent CPI data. Futures markets are now pricing in a 50 basis point hike in September as well.

Investors and policymakers know inflation will likely stay above target for a while. The Federal Reserve’s preferred inflation gauge is the Core Personal Consumption Expenditure (PCE) deflator and we could likely see a more definitive decline in the deflator when released later this month. The Fed prefers the deflator metric because the CPI does not account for product substitutions consumers make when prices change, whereas, the PCE deflator tracks price changes of actual consumer purchases.

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All index data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.