Inflation: No Scares on Friday the 13th

By BusinessWeek, Standard & Poor's, and Action Economics staff

At least this Friday the 13th wasn't unlucky for inflation watchers. After a barrage of speeches from Federal Reserve officials reminding the market of the central bank's worries that rising prices for goods and services could crimp the economy—and lead to interest rate hikes—the markets breathed a sigh of relief after the release of the May U.S. consumer price index on June 13, as the data did not top market expectations.

The CPI rose 0.6% in May, with the core rate (excluding food and fuel) rising 0.2%, about in line with expectations. The data follow gains of 0.2% and 0.1%, respectively, in April. Nonetheless, headline CPI rose a hot 4.2% over last year, accelerating from a 3.9% pace in April; the year-over-year core rate held at 2.3%.

While the year-over-year growth in headline prices will weigh on the bond market, the steady 2.3% year-over-year rate of growth for the core index may improve the mood in the financial market, according to S&P Economics.

Indeed, stocks were indicated to open higher June 13 as index futures climbed in premarket trading. Treasury prices moved higher, and yields moved lower, on the relatively benign report. The dollar moved higher vs. other major currencies.

Further Climbs in the Pipeline

As expected, energy prices led the way for the headline rate, rising 4.4% over April. On a year-over-year basis, energy was up 17.4%, vs. a 15.9% pace in April. Food and beverage prices rose 0.3%, and held at a 5.0% year-over-year pace. Housing costs were up 0.5%. Apparel prices dipped 0.3%, though tobacco prices climbed 0.8%.

"The headline y/y rate rose above the narrow 3.9%-4.0% range of the prior three months, and will likely rise further to 4.6% in June, 4.9% by July, and an assumed 5.3% peak in August if oil prices remain at current levels," according to a posting on the Action Economics Web site. "Today's figures were less dramatic than the big gains in [the June 12 release of the April] trade price report," notes Action, though gains in coming months for the headline inflation figure are "in the pipeline."

Action expects that next week's producer price index report for May will show a gain of 0.7% for the headline index and 0.1% for the core.

"Soaring prices will continue to plague the Fed and keep policy on hold at the June FOMC meeting," says Action. The economic research and forecasting outfit expects the Fed to reinstitute a policy bias in which the balance of risk for the economy tilts toward higher inflation, despite downside risks to the economy.