Wall Street is looking for a sign, any sign, that U.S. inflation is coming off a rapid boil. But they are unlikely to find much cooling off in May’s report on consumer prices.
The consumer price index is expected to show a large 0.7% increase when the report is released Friday morning — more than double the gain in the prior month.
And the number could be even higher after another spike in the cost of gasoline as well as steadily rising rents and food prices.
The increase inflation over the past year, meanwhile, is forecast to stay near a 40-year high of 8.4%.
In April, the yearly rate fell for the first time in eight months to 8.3%. The prior 8.5% reading in March was the biggest since December of 1981.
The big worry on Wall Street
is that inflation is shifting to services from goods. That’s because rising prices in services — think rent, hotel rates and plane tickets — tend to be harder to reverse and are often a sign inflation is becoming embedded in the economy.
Until very recently, most of the inflation in the U.S. was concentrated in goods such as new and used vehicles, gasoline, food and other consumer goods.
Goods inflation has been driven by a combination of high demand and ongoing shortages of key materials such as computer chips in the wake of the pandemic.
While the supply shortages appear to be starting to ease, the higher cost of gas, grains and other crucial materials has added to the cost of services.
Restaurants are paying higher prices for foodstuffs, for example, and home builders are still hampered by high costs of supplies and labor.
Last month, services accounted for about 40% of inflation —and the number is rising. The yearly rate of service inflation has almost doubled to 4.9% in April from last summer.
“Recently the drivers of inflation have been evolving towards services,” said U.S. economist Alex Pelle of Mizuho Securities.
By far the biggest contributor to service inflation has been escalating rents and home prices. Shelter is the single biggest component of the consumer price index, making up one-third of the overall price gauge.
Rents have climbed 4.8% in the past year — the fastest gain since 1987.
Owing to higher rents, the so-called core rate of inflation is forecast to rise a sharp 0.5% in May. That would put the yearly rate at a steep 5.9% vs. 6.2% in March.
The core rate omits food and energy and is seen as a more reliable predictor of future inflation trends. Food and gas price often undergo large swings and seldom remain high for more than a few years at a time.
The Federal Reserve, the nation’s inflation guardian, can’t ignore higher food and gas prices, however. They are household staples and are generating much of the public and political outcry about high inflation.
The central bank is on track to raise interest rates sharply over the next year and eventually that should slow the economy enough to start to corral inflation.
The 30-year fixed mortgage rate, for example, has doubled to nearly 5.5% from 2.7.5% last fall. Higher rates should dampen demand for housing and partly rein in housing costs, but it won’t happen overnight.
What does that mean for the Fed? The central bank is going to have to keep raising interest rates rapidly to show it means business — or risk higher inflation in the long run.
“Any thought of a ‘pause’ in Fed rate hikes in September, as Atlanta Fed
President [Raphael] Bostic mused about, seems highly improbable,” said Stephen Stanley, chief economist at Amherst Pierpont Securities.