Inflation Accelerates on Dissipation of "Transitory" Factors

Over the past six months, in speeches, testimony and analysis, Fed presidents have theorized flagging inflation is “transitory.” The most recent Consumer Price Index report, released last Friday, might just prove them right. So-called “core” CPI, the inflation indicator that excludes volatile food and energy prices, grew faster than expected at 1.8% year-over-year. The dollar strengthened in response, as market participants incorporated a slightly quicker timeline in the Fed’s hiking cycle. “A rate hike in June was unlikely,” Goldman Sachs suggested after reviewing the minutes of the last FOMC meeting, which took place in April. But stronger inflation lets the Fed know the economy can stand on its own two feet, and they may (a big “may”) be tempted to raise their policy target sooner than September, as economists currently forecast. “Seasonally adjusted petroleum prices subtracted from the index,” Goldman Sachs pointed out in a separate note focusing on inflation. The biggest surprise might have been a sudden increase in medical care services, which popped 0.9%, the most since 1990. CPI is not the Fed’s favorite indicator of inflation (they prefer PCE), but whatever the metric, we still have a ways to go before the reading hits their 2% annual acceleration target.

Sources: Bloomberg, WSJ, GS, SNWAM Research