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US CPI inflation rises 8.6% in May

Following on from the news that US inflation rose to 8.6% year-on-year, three investment and finance experts share their thoughts:

Sarah Giarrusso, Investment Strategist at Tilney Smith & Williamson, comments:

“US headline CPI inflation surprised on the upside and rose 8.6% in May (consensus: 8.3%), compared to 8.3% in April. On a monthly basis, CPI rose 1%, compared to 0.3% in April. The core CPI inflation measure which excludes food and energy, rose by 6.0% from a year ago (consensus: 5.9%), versus 6.2% in April. On a monthly basis, core CPI rose 0.6%, compared to 0.6% in April.

“The biggest contributors continue to be food, shelter and energy. Gasoline prices which reached $5 per gallon in the US was a key driver of the headline month on month increase. After declining last month energy rose 3.9%. Within core CPI used cars and trucks ended 3 consecutive months of declines to increase 1.8% over the month. Within services shelter increased 0.6% from the previous month and transportation services which includes airfares continues to rise.

“The Federal Reserve is on track to continue increasing interest rates to bring inflation back down to the 2% target. At the Fed’s next meeting on 16 June, markets are expecting a further 50bps increase in rates. The difficulty for the Fed now is to engineer a soft landing – increasing interest rates to bring inflation back down to target without impacting growth to the extent that the economy falls into recession. The US economy is still some way from recession in our view, with few economists forecasting negative growth in any quarter next year. The strong labour market and consumption continue to prop up the economy and gives Fed officials the leeway to raise rates further.

“Given the 50bps moves from the Fed leading the market to price in rates of around 3% by the end of 2022, allied with slowing inflationary forces, central bankers could be nearing peak hawkishness. Fed policy makers may, therefore, be able to ease slightly the pace of interest rate hikes later in the year which will be welcomed by investors. The US equity market is still adjusting to a more hawkish Fed position as growth stocks, which are more sensitive to rising interest rates, continue to underperform their value counterparts. Even with inflation starting to ease we are still a way from the Fed’s 2% inflation target, so they are unlikely to significantly soften their stance in the near future. Therefore. we remain in favour of value over growth in equity markets.”

Richard Carter, head of fixed interest research at Quilter Cheviot, says:

“Last month’s drop in inflation in the US was never going to be the start of it freefalling to more palatable levels, and today’s reading shows just how precarious the situation is with CPI rising 8.6% year-on-year, higher than expected and compared to last month. Inflation has had a profound impact to date and will continue to make life difficult for many over the coming months. In the US, gas prices on the forecourt are around the $5 a gallon mark, highlighting just how it is impacting everyday people and the dollar in their pocket. 

“This is also likely to be a very protracted peak with inflation to remain high for some time to come. Energy prices have the potential to keep rising further as the Ukraine war drags on and once China switches back on following their Covid shutdowns. This is very much a global problem and not going anywhere anytime soon. 

“The Federal Reserve is feeling the pressure and as such it appears nailed on to raise rates by 50bps next week. However, with fears of economic slowdown growing louder and global growth stagnating, it faces an awfully difficult task of ensuring the economy has a soft landing. The volatility that has been ever present since the start of the year is likely to become more entrenched over the coming months and until we see inflation under control and thus investors need to be patient when identifying potential opportunities.”

Allison Boxer, US Economist at PIMCO, comments:

“Today’s inflation figures came as an unwelcome surprise to the market. The challenge for the Fed is not just the magnitude of the surprise, but the source of the surprise. Rental inflation measures, which tend to be consistent with the underlying trend of inflation, jumped significantly more than expected. The challenge for the Fed is that there is a long lag between changes in the macro environment and rental inflation measures; even if the economy slows meaningfully and house prices fall and/or unemployment rise, that will take time to appear in CPI.

“Otherwise, core details were more or less in line with expectations. Core goods reaccelerated as expected due to autos and airfares which were extremely strong again. For headline inflation, the surging food and energy prices raise questions about the Fed’s ability to focus on core measures and the US consumer’s ability to weather a large negative income shock. Some of the goods price strength should still fall away, as previewed by Q1 retail earnings, particularly as disposable income gets squeezed by food and energy prices, but this report suggests the terminal destination is higher than previously thought.

“We expect the Fed to be in hawkish mode next week, which further raises questions about whether the US’s already stall-speed growth outlook is achievable.”

Commenting on US inflation reaching 8.6% in May and the likelihood of further policy tightening, Dan Boardman-Weston, CEO & CIO at BRI Wealth Management, adds:

US inflation came in at 8.6% in May, compared to consensus expectations of 8.3% and up from 8.3% in April. Inflation is running at multi-decade highs, due to large increases in the cost of energy, food and accommodation (increasing by 34.6%, 10.1% and 5.5% respectively). The current conflict in Ukraine and the covid induced lockdowns in China are putting further upward pressure on the rate of inflation and we’re likely to see persistently high readings over the coming months, albeit the rate may reduce from here, until growth starts to slow and supply pressures ease. The significant increases in the cost of living and the interest rate increases are starting to have a detrimental impact on current and future growth for the American economy and this is likely to bring inflation meaningfully lower over the medium term. The Fed has a tricky task ahead of them trying to ensure that inflation expectations don’t become entrenched but they are likely to continue tightening policy into a slowing economy. The ‘softish’ landing they are hoping for may continues to look like a big ask.”

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