US May CPI +4.2% vs +4.2% y/y expected

Headline CPI:

• Prior was +3.8%
• m/m reading +0.5% vs +0.5% expected
• Month-over-month unrounded +0.631%
• Unrounded headline +4.249% vs +3.811% prior

Core measures:

• Core CPI m/m +0.2% vs +0.3% expected. Last month +0.4%
• Core CPI y/y +2.9% vs +2.9% expected. Last month was +2.8%
• Unrounded core +2.851% vs +2.750% prior
• Real weekly earnings vs -0.2% prior
• Shelter +0.3% vs +0.6% last month
• Shelter y/y +3.4%
• Services less energy services +0.3% m/m vs +0.5% prior
• Services less energy services y/y +3.4%
• Food +0.2% m/m vs +0.5% m/m prior
• Food +3.1% y/y
• Energy +3.9% m/m vs +3.8% m/m prior
• Energy +23.5% y/y
• Rents +0.4% m/m vs +0.5% prior
• Owner’s equivalent rent +0.3% vs +0.5% prior
• Gasoline +7.0% m/m vs +5.4% prior
• Used cars and trucks +0.1% m/m vs 0.0% prior
• New vehicles -0.3% m/m vs -0.2% prior
• Airline fares +2.7% m/m vs +2.8% prior (+26.7% y/y)
• Lodging away from home +0.4% m/m
• Apparel +0.3% m/m vs +0.6% prior
• Medical care services +0.5% m/m vs 0.0% prior
• Medical care commodities -0.7% m/m vs -0.4% prior
• Hospital services +0.7% m/m
• Motor vehicle insurance -1.7% m/m vs +0.1% prior

The headline number is ugly — 4.2% is the hottest y/y print since April 2023 and dangerously close to rounding to 4.3% — but the guts of this report argue against panic. Strip out the oil shock and core rose just 0.2%, the softest since February. Shelter decelerated to 0.3%, OER matched it, and motor vehicle insurance fell 1.7%. The inflation here is overwhelmingly a gasoline story: energy contributed more than 60% of the monthly gain. The problem is we’re now into mid-June and the war still isn’t over and appears to be getting worse.

The Fed’s dilemma is whether to treat an oil-driven headline spike as something to hike against or look through. History says look through it, but with y/y headed toward 4.5%+ as base effects compound, the pressure will be intense and it’s not like core is below target. Even compounding at +0.2% m/m, it’s exceeding 2%.

Ahead of the report, the market was pricing in 11.7 bps of rate hikes for September and 25.3 bps for December. That’s virtually unchanged in the immediate aftermath.

Can we hear from the White House’s Kevin Hassett, who said in December ““If inflation has gone from 2.5% to 4%, you can’t cut rates then”

This article was written by Adam Button at investinglive.com.