Stocks plummeted this morning as bulls were stunned by a far hotter-than-expected inflation print. The May Consumer Price Index (CPI), released before the market opened today, showed that not only did inflation jump higher last month, but that it actually beat March’s year-over-year (YoY) gain of 8.5% as well.
Over the last two months, Wall Street analysts and Fed officials assumed that inflation had peaked in March. Strategists mostly debated how “sticky” inflation would be for the rest of the year, not whether it would continue to soar through summer.
But, after the Bureau of Labor Statistics (BLS) reported this morning that the CPI jumped 8.6% higher in May (vs. +8.3% expected), the narrative has changed completely.
March clearly wasn’t the peak.
Core CPI (which excludes energy and food) also beat estimates, rising 6.0% YoY vs. 5.9% estimated. Energy saw the largest gain – +3.9% month-over-month (MoM) – of all the price categories, pulled higher by a 16.9% MoM jump in fuel costs. But the price gains weren’t limited to just energy.
Shelter, airline fares, used vehicles, and new vehicles all soared, too.
Food costs also rose, led by price increases in chicken, eggs, milk, and cupcakes.
That’s right, not even cupcakes could escape last month’s inflationary burst.
Worse yet, we could easily see a higher inflation rate when the June CPI is reported next month.
The reason being that CPI climbed +1.0% MoM, which represents a +12.0% increase when annualized. Even if June’s CPI MoM gain is moderate, it’s unlikely to be enough to slow the next CPI YoY headline print given how quickly the index advanced in May.
That means inflation probably hasn’t peaked yet despite June’s CPI increase hitting a 41-year high. Many mainstream analysts skipped over this when they released their initial soundbites this morning. Or, they simply didn’t realize how much of an impact May’s monthly inflation jump could have moving forward.
“It’s confirming some of the fears I’ve been hearing from investors this week,” said RBC Capital Markets strategist Lori Calvasina, referencing the May CPI data.
“Does it sort of force equities to stay at the bottom the range it’s been in? Perhaps. I don’t think this is enough to force it down to new lows.”
A few analysts, however, managed to see the bigger picture.
“It’s hard to look at May’s inflation data and not be disappointed,” said John Leer, Morning Consult’s chief economist.
“We’re just not yet seeing any signs that we’re in the clear.”
MI2 Partners president Julian Brigden astutely observed that “nothing is good in this report” before adding that he “struggle[s] to see how the Fed can back off.”
The Fed shouldn’t back off. Or, more accurately, it won’t be able to if Powell & Co. plan on getting inflation under control. It’s gotten to the point now where the Fed needs to just bury its head in the sand and hike until inflation stops.
Placating frustrated market bulls in the short-term, as tempting as it may be, will only set the US economy down a more destructive long-term path.
Powell needs to reign-in inflation at all costs. This morning’s CPI print made that clear. And, as a result, stocks should continue lower for the foreseeable future.
