U.S. inflation is the highest in 13 years, with prices rising 5% in May, compared to one year ago.
Headline numbers, inclusive of volatile food and energy prices, jumped 5%, while core inflation rose 3.8%, its largest increase in 30 years. Most of the price hikes were in the cyclical re-opening related sectors of the economy that were battered by the pandemic, such as used cars and trucks that saw prices rise by 7.3% in May. Also, airline tickets, clothes and apparel, and hotel prices rose significantly last month. The question of whether current inflation is truly transient, as the Federal Reserve Bank chair Jay Powell keeps reminding us, is yet to be answered.
Although cyclical sectors have the potential to push prices up in the short-term, the main components of CPI, such as rentals, may also become a headache for the central bank at some point. Rental price increases compose around 30% of core inflation and have until now been relatively tame with rental prices growing by 0.2% in May and 1.8% within the last 12 months. However, the moratorium for evictions that was introduced as a part of the American Rescue Bill back in 2020 and has been extended twice since, is expiring at the end of this month. This means that roughly 43 million renters who struggled to pay rent ever since the COVID-19 pandemic started are now due to pay their outstanding debt. With 15 million Americans still on at least one unemployment program and most of the recovered jobs in low paying sectors, we can only speculate about the potential impact on the rental market. Should rental prices start increasing in the coming months, we are likely to see more sustainable inflation and a potential market reaction to push the already soft dollar to even lower levels.
The Fed expected to comment on jobs report and inflation numbers
After a rather uneventful ECB meeting last week, all eyes are now on the Federal Reserve Bank and the FOMC announcing their monetary policy statement, economic outlook and interest rate decision this Wednesday. With the U.S. economy and epidemiological status recovering more rapidly compared to Europe, the Fed watchers are going to keep a close eye on the language Fed officials will use. The main focus will of course be on the comments around jobs report and inflation print. The Non-farm payroll (NFP) report two weeks ago missed the consensus expectation but unemployment dropped to 5.8%. Inflation numbers, however, surprised to the upside, adding pressure for the Fed to take action.
It’s rather unlikely we will see any firm commentary from the Fed this round, although more hawkish members of the FOMC have commented on the media about the increasing need to start tapering asset purchases. The Fed has been pumping around U$ 120 billion of liquidity into the economy since the onset of the pandemic, compared to the EUR 76 billion (or around U$ 90 billion) injected by the ECB. With the labor market recovering and prices increasing, the Fed is expected to start planning tapering. If history is any guide, the markets are likely to throw a tantrum.
S&P 500 closed last week up 0.42% at another all-time high of 4247.45 points, while Nasdaq-100 rose 1.65% to 13,770.77 points, bolstered by lower benchmark interest rates. Russell 2000, representing U.S. small and medium companies, gained 2.16%. The dollar, measured by the DXY index, rose 38 basis points, while gold shed 0.72% last week, closing the week at 21-day exponential moving average of 1877.29. Oil broke $70 resistance level and closed at $70.7, rising around 2%.
Have a great trading week ahead!