06.10.2022: May’s inflation reading surged to its highest year-over-year level since 1981, undercutting our view that the Consumer Price Index (“CPI”) peaked in March. The Index increased 8.6% year-over-year (“yoy”), according to the Bureau of Labor Statistics. Arguably the month’s most anticipated data series, CPI rose 1% month-over-month (“mom”), topping all estimates. Shelter, food, and gas were the largest contributors. Core CPI, which strips out food and energy components, rose 0.6% mom and 6% yoy, also above economists’ expectations.

Transportation and utilities prices, fueled by rising energy costs, surged more than 2% for the month. Food costs rose more than 1% in May. While economists argue that food and energy prices are volatile and, as commodities, are vulnerable to falling prices, housing costs – which represent nearly one-third of CPI – are stickier. They rose 0.8% in May as rent increases and higher mortgage rates filtered in.

Graph 1, Market Update, 6.10.22

Our view that inflation will subside later this year was predicated on more difficult year-over-year comparisons and a shift in buying preferences away from goods, which have been constrained by the supply chain, toward services, where price increases are relatively more favorable. Durable goods prices, up more than 10% year-over-year, are off their 16% peak, while services prices are 5.2% higher over the last 12 months, largely due to wage increases.

Graph 2, Market Update, 6.10.22

This news has undoubtedly gotten the Fed’s attention. Fed funds futures suggest more aggressive rate hikes beginning in August, with the terminal rate closing in on 3%.

Graph 3, Market Update, 6.10.22

The 2-year rate, a widely watched barometer of anticipated monetary policy, reversed its recent decline and also surged toward 3%.

Graph 4, Market Update, 6.10.22

High and persistent inflation is one of the biggest risks facing the market, as it has the potential to force the Fed’s hand regardless of the economic environment. Our team remains defensive in our growth strategy and will look for solid evidence that inflation has peaked before adding risk to the portfolio.

Please do not hesitate to reach out to your Cresset advisor if you have any questions or concerns about your portfolio.