Consumer Inflation in May Eases, Core CPI Stays Elevated as Real Earnings Fall

Annual inflation cooled for the tenth straight month on a year-over-year basis, total CPI was up 4.0%, its lowest level since April 2021, below last months, and expected 4.01% per cent. However, core-CPI only dipped slightly to 5.3% year on year, barely moving since the end of last year. The Federal Reserve meets tomorrow and would be relieved from the report. On a monthly basis, the headline CPI index rose 0.1 per cent, versus a 0.4% gain in April. May’s decline was driven by gasoline prices. core-CPI, which excludes food and energy, was also up 0.4% month-over-month.

The index for shelter was the largest contributor to the increase in total CPI and core-CPI; however, the 0.4% increase was the smallest increase for the shelter index since January 2022.

The fragility is complicating policymakers’ already bumpy path to slowing the economy. The Fed last week raised its benchmark federal-funds rate by an additional quarter-percentage point to a range between 5% and 5.25%, a 16-year high with its 10th consecutive rate increase.

US May 2023 Highlights

CPI

• CPI (Y/Y) May: 4.0% (est 4.1%; prev 4.9%)
• US CPI (M/M) May: 0.1% (est 0.1%; prev 0.4%))

Headline CPI for May 2023

• 3-month annualized rate: +2.2%
• 6-month annualized rate: +3.2%
• 12-month change: +4.0%

Headline CPI for May 2022

• 3-month annualized rate: +9.7%
• 6-month annualized rate: +9.2%
• 12-month change: +8.6%

Core inflation:

• CPI Core (Y/Y) May: 5.3% (est 5.2%; prev 5.5%)
• CPI Core (M/M) May: 0.4% (est 0.4%; prev 0.4%)

Headline Core CPI for May 2023

• 3-month annualized rate: +5.0%
• 6-month annualized rate: +5.1%
• 12-month change: +5.3%

Headline Core CPI for May 2022

• 3-month annualized rate: +5.8%
• 6-month annualized rate: +6.4%
• 12-month change: +6.0%

Where the Prices Changed

• Shelter, used cars and motor vehicle insurance all contributed to the monthly advance.
• Airfares and household furnishings declined.

It appears the surge in prices is over with supply chains mostly healed. Services inflation is the directional key with consumer demand having shifted back toward services from goods.

Price changes over last year (CPI report)…

• Transportation: +10.2%
• Food away from home: +8.3%
• Shelter: +8.0%
• Electricity: +5.9%
• Food at home: +5.8%
• New Cars: +4.7%
• Overall CPI: +4.0%
• Medical Care: -0.1%
• Used Cars: -4.2%
• Gas Utilities: -11.0%
• Gasoline: -19.7%
• Fuel Oil: -37.0%

Lower spending on goods, ongoing improvement in supply chains and falling shipping costs should continue to ease price pressures in coming months. The deflationary pull from improved supply chains will lessen with order now largely restored at US factories and ports. However, there are many possible shifts with the multiple geopolitical powder kegs out there with Russia and China.

A reminder we are coming off June 2022 9.1% inflation rate which was the highest in four decades. CPI has moderated after resurging in August with aggressive Fed interest rate rises.

The new data also reflects an update to the weights of goods and services in the spending basket to capture changes in consumer preference. The Labor Department previously updated these every two years but starting with January’s release will revise them annually.

Used car & truck component of CPI still negative year/year in May, but slight move higher in trend to -4.2% … on month/month basis, component was up +4.4%

Services Inflation Peaking?

• Services inflation in the United States eased for the fourth month to 6.3% year-on-year in May 2023, the lowest in ten months, from 6.8% in the prior month.

Real Earnings

• Real Avg Weekly Earnings (Y/Y) May: -0.7% (prevR -1.2%)
• Real Avg Hourly Earning (Y/Y) May: 0.2% (prevR -0.6%)

The Fed is likely to want evidence of an inflation slowdown, prior to the banking collapse another 0.50-point rate rise was on the table at the next meeting as rises “depend on the data we get between now and then.”

Market Reaction (updated at 9:30 AM ET)

• The initial reaction to the CPI is for the dollar and yields moved lower and the NASDAQ is higher all suggesting a “happy” number for the market.
• The S&P 500 futures are up 24 points and are trading 0.5% above fair value.
• The Nasdaq 100 futures are up 137 points and are trading 0.9% above fair value.
• The Dow Jones Industrial Average futures are up 116 points and are trading 0.4% above fair value.

After CPI has been digested, probability for pause (skip?) getting close to 100% via ⁦@CMEGroup

Yields After CPI

• 2-yr: -10 bps to 4.49%
• 3-yr: -12 bps to 4.11%
• 5-yr: -9 bps to 3.83%
• 10-yr: -7 bps to 3.70%
• 30-yr: -5 bps to 3.86%

Yields Before CPI

• 2-yr: -2 bps to 4.57%
• 3-yr: -5 bps to 4.18%
• 5-yr: -4 bps to 3.88%
• 10-yr: -5 bps to 3.72%
• 30-yr: -4 bps to 3.87%

In forex the USD is lower on the back of lower yields.

Yearly Price Increases

• A slowdown was seen in food prices (10.1% vs 10.4%) while cost of used cars and trucks continued to decline (-11.6% vs -8.8%).
• Cost of shelter increased faster (7.9% vs 7.5%)
• Energy rose (8.7% vs 7.3%), with gasoline prices rising 1.5%, reversing from a 1.5% decline in December. On the other hand, both fuel oil (27.7% vs 41.5%) and electricity prices slowed (11.9% vs 14.3%).

Shelter Costs Adding to Homeless

Shelter costs, the biggest services’ component and make up about a third of the overall CPI index.

• Shelter cost which accounts for over 30% of the total CPI basket, slowed for the first time in two years (8.1% vs 8.2%)
• The index for shelter (+0.4%) was the largest contributor to the increase in total CPI and core-CPI; however, the 0.4% increase was the smallest increase for the shelter index since January 2022.

Rent Inflation

Rent Inflation in the United States eased marginally to 8.1% in April 2023, from 8.2% in the prior month, which was the highest reading since June 1982.

Housing Utilities

Many analysts had expected back in March 2022, clearly, they have been mistaken to mark the inflation peak although the war in Ukraine is far from over, supply chain bottlenecks persist, and consumer demand remains elevated which is likely to weigh on the CPI.

Food Inflation Persistently High, But Falling

Food inflation in the United States fell to a 15-month low of 7.7% year-on-year in April 2023, from 8.5% in the prior month and a peak of 11.4% in August 2022. Prices continued to slow down for food at home (7.1% vs 8.4% in March) and food away from home (8.6% vs 8.8%).

Transportation Inflation Persists

The effects of the coronavirus pandemic, then the supply crisis and throw in the Russian invasion of Ukraine on top have been weighing on prices. Since last year many businesses closed and lockdowns were imposed, denting economic activity leaving the world vulnerable.  A jump in commodities and material costs, coupled with supply constraints pushed producer prices up and some companies are passing those costs to clients.

“I’m making more money…But I don’t see it because I’m paying more money for stuff now.” Low-wage workers are getting sharp raises. Inflation is eating them up. via Greg Ip WSJ

 Source: BLS BLS

From the Traders Community News Desk