The higher than expected May US CPI result has again highlighted the debate over whether the recent lift in global inflation pressures are temporary or more persistent? Core (i.e excluding food and energy) US consumer prices rose by 0.7% in May after a rise of 0.9% in April, taking the annual rate to 3.8% – a level not seen since 2008!
At least in terms of US consumer prices, one factor pointing to it being transitory is the narrow range of especially large price gains.
- Used car and truck prices rose by 7% in May, after a 10% gain in April. These have a weight of 4% in the core CPI, implying these price gains alone accounted for around one half of the last two monthly increases in the core consumer prices.
- Airline prices rose 7% in May after a 10% gain in April. These have a weight of just under 1% in the core CPI, implying these prices gains account for a further 10% of the core CPI increases.
Another way to assess the breadth of price increases is to look at alternate measures of underlying consumer price inflation: such as the “median” CPI and the “trimmed mean” CPI, produced by the Federal Reserve Banks of Cleveland and Dallas respectively. After ranking each CPI item by the magnitude of their price change, the median CPI measures the price change for that items at the 50th percentile. The trimmed means takes the average price change of items after excluding those with the very largest and smallest price changes.
As seen in the chart below, the surge in annual growth in the core CPI (which just strips out food and energy) to 3.8% has been very large relative to the annual growth in both the median (2.1%) and trimmed mean (2.6%) CPI measures.
This again suggests the surge in the core CPI has been concentrated among just a few items. Such concentration in turn suggests special factors in certain sectors are at play, rather than broader based price pressures across the whole economy.
What is critical to the US inflation and interest rate outlook is whether the monthly “run rate” of CPI increases begin to slow back below a 2% annualised rate over the second half of the year. Given the still high level of economy-wide unemployment, and the likelihood that lingering supply chain bottleneck resolve themselves, a slowdown in US inflation seems the most likely outcome. In turn, that could keep Fed tightening expectations on hold and US bond yields contained (US 10-year bond yields, for example, holding below 2%) which would remain supportive of equity market valuations around current levels.