• CPI accelerated to 8.6% yoy in May

• CPI core pulled back to 6.0% yoy however

• Food index rose by 10.1% yoy

• Accelerating US inflation strengthens USD

• US inflation numbers set the stage for more hikes from a hawkish Fed

US consumer prices showed little signs of slowing in May with the headline consumer price index rising by 1.0% from a month earlier. This gain also lifted the year pace of inflation to a fresh 40-year high of 8.6%. Price gains continue to be relatively broad-based, with both goods (+1.3%) and services (+0.8%) prices advancing last month, but much of the upward surprise can be tied to the volatile food and energy components. Energy prices rose 3.9% mom – as both gasoline (4.1% mom) and energy services (3.0% mom) were up on the month. Food prices also continued to accelerate, rising 1.2% mom and are now up 10.1% on year-ago basis. But even when we strip out these volatile categories, core inflation still rose 0.6% during the month. While the gain in the core estimate of inflation was still higher than expected, it did translate to a deceleration for core inflation to an annual rate of 6.0% from 6.2% in April. In turn, core services inflation, which tends to be stickier and less volatile, decelerated only slightly above last year’s average. This suggests that core inflation – the main yardstick for monetary policy – is not coming down to a level the Fed would like it to be at any time soon. One area where inflation is starting to abate is online spending which increased by just 2.06% from a year ago, down from April’s 2.9% rise and March’s 3.6% jump.

We believe the worst is still to come for inflation. We suspect the formidable momentum in inflation could push the headline rate for CPI to reach close to 9% and therefore, to remain far too high for the Fed's liking. This suggests the FOMC will fight back aggressively with tighter policy until it sees inflation is demonstrably on the downswing. Another 50bps rate hike is all but assured at this week's FOMC meeting, and another 50bps hikes in July. It also suggests there will be little immediate relief for consumers.

Source: BIMB Securities Research - 13 Jun 2022