CPI AGAIN EXCEEDED ESTIMATES…INCREASE VIEWED AS “TRANSITORY”

Prices paid by consumers rose in May by more than forecast, extending a months-long buildup in inflation that risks becoming more established as the economy strengthens.   The gains were broad based.

Compared with the same month a year ago, the CPI jumped 5.0%, the largest annual gain since August 2008, though the figures remain distorted by the base effect.  The comparison to the pandemic depressed index in May 2020 makes the year over year inflation appear stronger.

The core measure—which excludes food and energy—rose 3.8% from 12 months ago, the most since 1992.  However, underscoring the clear acceleration in inflation more recently, the core CPI over the past three months has increased at a 5.2% annualized, the fastest since 1991.

Fed Chair Powell has adamantly stated upward pressure on prices is likely to be temporary.

Is this an accurate assumption?  The debate is intense given the persistent rise in wage inflation, primarily the result of government policy, and now the rise in owner’s equivalent rent (OER) which is a major component of all inflationary indices.

Morgan Stanley opined “while transitory factors did a lot of heavy lifting driving the May upside, the more persistent components like rents and OER firmed up well much more than expected, pointing to a firm source of foundation for inflation data as the transitory factors begin to fall out of the figures.”

Morgan Stanley further opined the rise in OER and wages do not support the narrative that such factors are indeed “transitory.”

Citicorp publishes several “surprise indexes.”  The inflation surprise index is at an all-time high, an index designed to measure the degree of positive or negative surprise as compared to published estimates.  This index clearly states analysts have consistently underestimated actual inflation as compared to forecasts.

What conclusions can be made?  In my view, if the rise in inflation is indeed not transitory, the potential reaction might be greater than it may normally be.

Evidence to support such a belief is the 10-year Treasury breakeven rate have fallen about 24 basis points since the May 17 peak, a stark contrast of two months of “massive” gains in the CPI.

Bloomberg writes “the decline in the breakeven rates means the market is committed to the Fed’s transitory narrative even though the data clearly suggests it might not be.”  Bloomberg further writes any snap back may be “significantly greater than expected.”

Equities, led by technology traded higher and Treasuries remained essentially unchanged on the belief inflation is indeed “transitory.”

Last night the foreign markets were up. London was up 0.66%, Paris up 0.79% and Frankfurt up 0.62%.  China was down 0.58%, Japan down 0.03% and Hang Seng up 0.36%.

The Dow should open nominally higher.  The 10-year is off 4/32 to yield 1.45%.

 

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