Heat Wave in May

The consumer price index (CPI) rose 1.0% in May from April, much stronger than many expected. The index increased 8.6% from a year ago, a new pandemic high (so much for peak inflation). Gains were broad-based with the exception of housing-related items including furniture and appliances; cleaning supplies were also lower.

Food and energy prices continued to rise. Food at grocery stores was up 11.9% compared to a year ago, the highest increase since the stagflationary period of 1978. The war in Ukraine has pushed up prices on everything from cereals to baked goods (cookies were up a whopping 4% on the month alone). Rice and pasta were up 12.8% from a year ago, which makes it hard for households to trade down to less expensive food items. Proteins were up 14.2% compared to a year ago, with beef and pork decelerating while chicken, fish and lunchmeats picking up on higher energy costs and bird flu losses.

Gas prices rebounded along with other energy prices; lower-income households are hit particularly hard. Consumers have been pushing their tanks as far as possible; the auto club AAA serviced 32% more “out of gas” roadside calls compared to a year ago. It is stunning the tradeoffs consumers are having to now make.

Core CPI (taking out food and energy components) rose 0.6% in May, the same as we saw in April. Shelter costs drove the gains, coupled with continued gains in vehicle prices, offsetting the negative impact of spending on household goods.

Big-box retailers are cutting the prices of housing-related goods, but other items remain in short supply. The prices for clothing, footwear, jewelry and luggage all rose during the month. Consumers are still spending to see and be seen.

Rent, owner’s equivalent rent and hotel costs continued to rise, along with airfares and car rentals. Consumers traveled for the Memorial Day Weekend; airlines reported a 25% surge in air travel relative to the same weekend a year ago.

New and used vehicle prices picked up. A combination of chip shortages and strong demand due to delays in tax refunds boosted prices during the month. Dealers claim they are selling out their lots. Anecdotal reports suggest dealer markups hit a new high in early May. Supply chain problems persist and are likely to get worse; China just announced yet another round of lockdowns.

Bottom Line
The surge in inflation is global in scope. The Federal Reserve is committed to reducing demand to meet a supply-constrained world. This inflation reading will strengthen that resolve; we expect the unemployment rate to rise above 5% before inflation is tamed. The more consumers spend, the more the Fed has to tighten policy; this ups the risk of a recession.

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