Inflation remains the big story at the halfway point of 2021, as the base-effect impact of Q2 data wanes briefly before likely resuming in late Q3. The Fed’s insistence that the broad-based rise in prices is “transitory” has kept equity markets calm and bond yields subdued. Should the Fed prove to be incorrect, we could see a dramatic re-rating of risk assets by year-end.
Headline CPI for May rose +0.6% MoM and +5.0% YoY (the “base-effect” referring to the period a year ago when the economy was largely shut down and prices were falling), while producer prices edged up +0.8% MoM in May and +6.6% YoY. Within the PPI number, grain prices surged +25.7% on the month, metals were up +6.9%, and beef and veal prices rose +10.5%. We have started to see a decline in some input costs as lumber is off nearly 40% from its recent high. The PCE Deflator rose +0.4% MoM and is up +3.9% YoY.
Despite this rise in prices, the Fed remains focused on employment. The June report for May showed +559k new jobs created and a 5.8% unemployment rate. Chair Powell has insisted he would like to see that rate get closer to pre-pandemic levels of sub-4% before potentially tightening monetary policy. Average Hourly Earnings rose +0.5% in May and are up +2.0% YoY. Rising wages continue to be the story as employers try and coax workers off of enhanced unemployment benefits and back into the labor force.
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