Transitory inflation? Nope.

There had been some hope that US consumer price inflation had reached a peak in April, when the month-on-month increase was a modest 0.3 percent. However, data released this morning by the Bureau of Labor Statistics showed a 1.0 percent jump in headline CPI for May, which propelled the year-on-year gain to 8.6 percent, the highest figure recorded since December 1981. 

Energy and food prices continue to be the main drivers of the rise in headline CPI, and with no sign of any end to the war in Ukraine, supply-driven pressures on those key items are unlikely to ease any time soon. Energy prices rose 3.9 percent in the month, bringing the yearly increase to 34.6 percent. For food, the corresponding numbers are 1.2 percent and 10.1 percent. Even excluding these items, however, there is plenty of evidence that the current inflation spike is broad-based. The index for all items less food and energy rose 0.6 percent in the month, the same as in April, to stand 6.0 percent higher than in May 2021. 

Major retailers are starting to bemoan rising inventories as consumers rein in discretionary spending, and this may translate into price reductions in the coming months. However, gasoline prices have hit fresh all-time record highs yet again in the first part of June, so the all-items index is likely to stay at or close to its May level for at least another month or two.

Equity markets sold off sharply on this morning's news, reflecting investor fears that the data might push the Fed into a 75 basis point rate hike at next week's two-day FOMC meeting. This cannot be altogether ruled out, but the Fed is acutely aware that it cannot directly do very much about the current inflation spike, given that it originates on the supply side of the economy.  A further 50 basis point hike remains the most probable outcome, accompanied by more tough rhetoric about the need for more tightening, in the increasingly vain hope of keeping inflation expectations under control. 

The job would have been so much easier if the Fed had acted on the hawkish rhetoric it adopted six months ago and started the tightening cycle a month or two earlier. Hindsight is wonderful, of course, but there were plenty of people saying that at the time. Oh well.