Headline CPI in May rose by .6% headline and .7% core vs the estimate for up .5% for both. These follow .8% and .9% increases respectively in April. Versus last year, headline CPI is now up 5% and the core rate by 3.8%. To rid ourselves of the easy comp/base effect discussion, May headline CPI was up 5.1% versus May 2019. In other words, about 2.5% per year. The core rate is up by the same amount vs May 2019 so I hope we can now rid ourselves of the base effect excuse.
In breaking down the inflation analysis here between services inflation (VERY persistent) and goods inflation (VERY cyclical that averages around zero), services inflation ex energy rose .4% m/o/m after a .5% rise in April and a .4% increase in March. They are up 2.9% y/o/y. Core goods prices spiked by 1.8% m/o/m after a 2% increase in April. They are now up 6.5% y/o/y.
Within services, Rent of Primary Residence rose .2% m/o/m for a 4th straight month while Owners’ Equivalent Rent was up by .3% m/o/m. With the wide gap between home price increases (13%) and rental growth, expect rents to play catch up, thus accelerating services inflation. Positively, medical care costs were subdued, falling by .1% m/o/m and up by .9% y/o/y with healthcare services little changed and drops in prescription drugs. On the other hand, as the pace of driving picks up steam, auto insurance prices jumped by .7% m/o/m after a 2.5% jump in April and 3.3% increase in March. Airline prices jumped but are still below the 2019 levels. If you have a pet, pay up. Pet services prices rose .6% m/o/m and 5% y/o/y and vet service prices jumped by 1.2% m/o/m and by 5.4% y/o/y. Not surprisingly, ‘food away from home’ prices rose .6% m/o/m and 4% y/o/y.
On the goods side, used car prices rose 7.3% m/o/m after a 10% jump in April. They are now up 30% y/o/y. We certainly know what’s going on here and new vehicle prices, if you can get one, rose 1.6% m/o/m after a .5% gain in the month before. Apparel prices, as we start buying clothes again, was up by 1.2% on the month and up by 5.6% y/o/y. Furniture prices were up sharply across the board by 1-3% in the month. Major appliance prices rose 12% y/o/y and for laundry equipment by 27%.
Energy prices were flat m/o/m but up 29% y/o/y. Food prices grew by .4% m/o/m and 2.2% y/o/y.
Bottom line, I believe we can now throw out the base effect/easy comps argument as prices are now rising solidly to where they were in 2019. As stated here many times, the whole transitory or not debate is only on the goods side as services inflation is ALWAYS sticky (outside of pandemics) and persistent and we are in the midst of the most widespread scenario of goods price pressures since the 1970’s.
In response, the 10 yr inflation breakeven is rebounding by 4 bps to 2.37% and the 3 yr by 6 bps to 2.62% and the 5 yr also by 6.5 bps to 2.50%. The 10 yr nominal yield is up by 2.5 bps and I remain of the belief that we’ll be above 1.75% by the end of the summer after we see more months of high inflation reads. Thus, 1.50% will likely be the lower end of this range and the recent Treasury rally is over I believe.
CORE GOODS PRICES m/o/m
ECB president Lagarde gave her thoughts on inflation in today’s press conference and she is VERY sanguine. While raising its inflation stats, she said ‘long term inflation expectations remain subdued’ and that while ‘underlying price pressures will increase somewhat’, ‘slack and a higher euro will damp pressures.’ I think she and her colleagues will be mugged by the reality of sticky inflation in the coming months. I’ve heard Lagarde say ‘temporary’ a lot so far in her press conference.
Initial jobless claims fell to 376k from 385k, just above the estimate of 370k. The 4 week average fell to 403k from 428k. PUA fell by 2k w/o/w to 71k. Also positively, continuing claims fell by 258k after rising by 146k as hopefully some of those job openings are getting filled. Delayed by two weeks, those still receiving emergency claims fell by 70k and continuing PUA was down by 13k.
Bottom line, the pace of firing’s continue to moderate and it was good to see the drop in continuing claims but both remain about double the level pre Covid.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.