US inflation has hit a three-year high. Should we expect a rate hike?
Inflation in the US has hit a three-year high / Photo: Zamrznuti tonovi / Shutterstock
The U.S. consumer price index (CPI) in May rose 0.5% from April and 4.2% year-on-year, according to data from the U.S. Bureau of Labor Statistics. This is the strongest annualized increase since April 2023, indicating an even stronger acceleration in inflation in annual terms compared to the rate of 3.8% recorded last month, Yahoo Finance wrote. The data matched the expectations of economists surveyed by Bloomberg
As for the core CPI, which excludes volatile energy and food costs, it rose 0.2% relative to April (slightly below Wall Street's forecast of 0.3%) and 2.9% year-over-year. May's core CPI growth rate was just above April's 2.8%. Although the core CPI rate is noticeably behind the rapidly rising overall inflation rate, it has been well away from the Federal Reserve's 2% target for more than five years, Barron's points out. Nevertheless, a month-to-month increase of only 0.2% is a relatively encouraging sign - it indicates that the oil shock has so far been contained, MarketWatch writes.
What's in the markets
Futures on S&P 500 amid the publication of macroeconomic data decreased by 0.9%, futures on Nasdaq 100 - by 1.5%. Exchange contracts on Dow Jones lost 0.8%.
What does that mean
Energy was the main driver of the sharp rise in consumer prices at the end of the month, although the cost of food is also increasing, notes Yahoo Finance. As of June 9, U.S. retail gasoline prices averaged $4.16 per gallon, about $1 higher than last year, according to the American Automobile Association (AAA). In addition, high commodity prices not only increased the overall energy index within the CPI, but also pushed up transportation costs as well as food costs. In addition, due to the spread of the parasitic fly in South Texas, beef prices are projected to rise in the coming months, Barron's adds.
"Higher energy prices continue to push up overall inflation. And we don't expect much relief in the food sector, especially after the recent news on beef prices," Yahoo Finance quoted Royal Bank of Canada economists as saying.
Inflationary pressures are also intensifying because companies appear to have sufficient market power to pass on increased costs to the end consumer. Purchasing managers' indices (PMIs) from the Institute for Supply Management (ISM) for both the manufacturing and services sectors showed that raw material and component costs continued to rise in May.
In addition to the oil shock, other inflationary factors are also affecting the market. Thus, in recent months, higher duties have also influenced the rate of price growth - especially in the commodities segment, Barron's reports.
What's next
Rising consumer prices as well as wholesale inflation statistics, which will be released on Thursday, will be key factors for Fed guidance ahead of the June 16-17 meeting. Labor market data released last week showed that employment remains broadly balanced, Yahoo Finance writes. This brings the issue of inflation to the forefront as it continues to hold well above the Fed's long-term 2% target.
The Federal Reserve is likely to decide to pause raising or lowering rates at its monetary policy meeting in a week, but will move to raise interest rates in the coming months if the unemployment rate falls to 4.2% and core inflation reaches 3%, according to Mizuho senior economist Alex Pelle. His opinion quotes MarketWatch.
"At 3%, there is no reasonable doubt as to whether inflation is above the Fed's target," Pelle noted. A drop in the unemployment rate to 4.2% would signal excess demand in the economy. It would prove that inflation is not just caused by temporary supply shocks but has deeper internal causes, Alex Pelle added. For the past three months, the unemployment rate has held steady at 4.3%.
Most market participants believe the Fed will keep the benchmark interest rate in the target range of 3.5-3.75% at the end of its June meeting. However, a number of officials, including voting members of the Federal Open Market Committee (FOMC) - head of the Federal Reserve Bank of Cleveland Beth Hammack and head of the Federal Reserve Bank of Dallas Laurie Logan, as well as head of the Federal Reserve Bank of Kansas City Jeff Schmid - have already warned that the regulator may have to raise the cost of borrowing to bring inflation back to the 2% target, Barron's writes.
This article was AI-translated and verified by a human editor
