Inflation remained the topic du jour during May, with no let-up in high prices in sight. Both Federal Reserve officials and more recently Treasury Secretary Yellen have owned up to getting the inflation picture wrong. As something that punishes lower-income workers more than the well-off, inflation is the single most important political issue ahead of the November mid-term elections.
The Consumer Price Index for April rose +0.3% MoM while Core PPI (ex Food & Energy) surged +0.6%. This translates into +8.3% and +6.2% YoY increases, among the highest seen in 40 years. Producer Prices rose +0.5% MoM with Core PPI up +0.4% (equaling +11.0% and +8.8% respectively YoY). The PCE Deflator rose +0.2% in April (+6.3% YoY) while the PCE Core Deflator edged up +0.3% (+4.9% YoY). With energy prices remaining high thanks largely to the Russia/Ukraine war and China’s “zero Covid” policy continuing to hinder global supply chains, both energy and consumer goods prices are likely to remain elevated for some time ahead.
On the labor front, Average Hourly Earnings rose +0.3% in April and are now up +5.5% YoY. The Unemployment Rate came in at 3.6% while the latest JOLTS Job Openings survey shows 11,400k jobs available currently (a slight downtick from last month’s all-time high of 11,855k). Initial Jobless Claims averaged 208k in May, with Continuing Claims hovering around the 1,347k level. The Labor Force Participation Rate remains low at 62.2%, and large urban companies continue to struggle with “return to office” mandates.
Despite higher interest rates (and hence mortgage rates), the housing market remains robust. The notoriously busy spring buying & selling season has been plagued by low inventory, highlighting the fundamental mismatch between the supply of and demand for single-family housing in the U.S. Housing Starts fell -0.2% MoM in April while Building Permits dropped -3.2%. New Home Sales tumbled -16.6% MoM while Existing Home Sales fell -2.4% and Pending Home Sales fell -3.9%. Long-term mortgage rates above 5% have further reduced affordability, while a 2.42% MoM uptick in the S&P CoreLogic 20-City Price index (+21.2% YoY!) didn’t help new home buyers either.
The Federal Reserve meets again on June 15th and another 50 basis point hike in the Fed Funds rate is expected. The FOMC also should announce the beginning of balance sheet reduction. Despite the recent market trend towards lower interest rates, we would expect these actions to put further upward pressure on Treasury rates, taking the 10-year back towards the 3.00% level. With inflationary pressures unlikely to recede any time soon, more hawkish rhetoric from Fed officials may become the order of the day.
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