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Why May’s Inflation Was Just Hot Enough

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Inflation grew 0.2% in May

On June 12, the US Bureau of Labor Statistics reported that US consumer prices rose 0.2% in May, adding to the 0.2% increase seen in April. Consumer prices continued to move higher, and have now exceeded the Fed’s 2% target. Over the last 12 months, US inflation (TIP) has grown by 2.8%, the highest inflation growth rate recorded since 2012. Core inflation (VTIP), which excludes volatile food and energy prices, rose 0.2%, taking core inflation growth over the last 12 months to 2.2%.

Key drivers of May inflation

Based on the May inflation report, the primary reason for the continued increase in inflation was energy (XLE) prices, which rose 0.9% in May as gasoline prices increased. Energy prices were partially offset by natural gas prices falling as demand plummeted in a hotter-than-usual May. Prices for food were unchanged in May. Rising house prices (XHB) continued to boost inflation and are likely to remain a key contributor to inflation in the months ahead.

Overall impact on the economy

May’s inflation numbers proved that the recent uptick inflation is here to stay, and could pressure the Fed to increase interest rates going forward. While the May inflation numbers may not affect a potential June rate hike, investors may remain skeptical about the Fed’s recent communication that it was okay with inflation (SCHP) overshooting its 2% target. The current level of inflation is perfect for keeping the Fed and investors on the same page with respect to interest rates, but a few more upticks before the December meeting could unsettle investors again. In the next part of this series, we’ll explore the Fed’s possible reaction to increasing inflationary pressure.

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