The Consumer Price Index (CPI) climbed to 4.2% year-over-year in May, up from 3.8% in April, marking the fastest increase in over three years. This acceleration was largely attributed to rising energy prices, which accounted for 60% of the overall inflation increase, exacerbated by the Iran war. Food and shelter costs also contributed to the upward pressure.
Despite the overall acceleration, the "core" CPI, which excludes volatile food and energy prices, showed a more moderate increase. Core inflation rose by 0.2% month-over-month, below expectations of 0.3% and down from 0.4% in April, while the annual core inflation rate ticked up to 2.9% from 2.8%.
Economists and analysts anticipate that the Federal Reserve will likely hold interest rates steady at its upcoming meeting, reinforcing a "hawkish hold." While some officials are concerned about inflation becoming embedded, others, like JPMorgan Asset Management's David Kelly, suggest May's CPI might be a peak, especially if the Strait of Hormuz reopens, leading to a potential drop in energy prices.
New York Fed President John Williams indicated that inflation might peak in the near future, assuming the Strait of Hormuz opens, but expects it to remain elevated through the rest of the year. The report comes just before Kevin Warsh's first meeting as the new Fed Chair, with some economists, like RSM's Joseph Brusuelas, suggesting that the Fed risks falling behind the curve on inflation, potentially leading to a market-induced policy tightening.
Morningstar's Preston Caldwell noted that while the milder core inflation is somewhat comforting for the Fed, sustained data and a resolution to the Iran war would be needed to rule out rate hikes in the next 12 months. The yield on the 2-year Treasury remains around 4.1%, implying a potential 25 basis point rate hike above the Fed's current policy rate of 3.5% to 3.75%.
