Alex Tovstanovsky, owner of used car dealer Prestige Motor Works, checked on Jan.

Nick Carey | Reuters

Consumer prices rose faster than expected in May, but the rise in inflation appears temporary and should not prompt the Federal Reserve to tighten monetary policy for the time being.

The consumer price index rose 5% yoy in May, its highest level since the summer of 2008 when oil prices soared. Excluding food and energy, core CPI rose 3.8% yoy, its highest since 1992. A third of the increase was attributed to a sharp 7.3% increase in used car and truck prices.

Fed officials have called the current period of high inflation temporary, meaning it should be short-lived or short-lived. You have been expecting increased price increases for several months due to the backlog and delays in the supply chain. The comparison with the weak values ​​of the previous year – at a time when the economy was largely at a standstill – also plays a role.

“The rise in inflation is stronger than expected, but it still looks like it is in transition categories,” said John Briggs of NatWest Markets. “[Fed officials] can probably get away with talking about the ephemeral. “

The Federal Reserve meets on June 15th and 16th. There has been some market speculation that the central bank could extend the timeframe in which to discuss a departure from its loose policy if inflation looked very hot.

Economists believe the first step in easing is for the Fed to speak publicly about its decision to cut the $ 120 billion in government bonds and mortgages it buys every month.

The bond purchase or the so-called “quantitative easing” program should create liquidity and keep interest rates low.

After the discussion about its bond program has started, the central bank should wait several months before starting to gradually cut purchases down to zero. The Fed would then consider raising its federal fund target rate from zero, but that’s not expected until 2023.

Many economists had expected the Fed to speak for the first time about tapering bond purchases at its Jackson Hole economic symposium in late August before actually reducing the size of purchases in late 2021 or next year.

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Mark Zandi, chief economist at Moody’s Analytics, said there is evidence that price pressures may be volatile, as the Fed expects.

“A lot of the price increases are due to things that are normalizing. … Hotels and rental cars and used cars, sporting events, restaurants. Everyone is getting back to normal right now, so prices are going back to what they were before – pandemic, “Zandi said.

However, he added that it was too early to say that inflation will not be more persistent than the Fed expects. “It is premature to conclude that all of this is temporary and that underlying inflation will eventually land once we get through price normalizations,” Zandi said. He expects inflation to be higher after the spike ends than it was before the pandemic.

The Fed has announced that it would tolerate inflation above its 2% target and it would consider an average range for those price increases. That means it has pledged to withhold rate hikes as soon as it sees rising inflation risks, as has been the case in the past.

Financial markets easily absorbed the rise in the CPI and stocks rose at 8:30 a.m. ET after the report. The Dow gained more than 200 points but gave up on its best wins. The 10-year Treasury was slightly higher at 1.49% after initially rising to 1.53%. The returns move against the price. Fears that inflation would cause the Fed to change monetary policy earlier would have driven yields much higher.

The components of higher prices

Economists said some of the price increases came as a surprise, but price gains among the larger contributors to the consumer price index remained relatively subdued.

“The used car component is just amazing,” said Grant Thornton Chief Economist Diane Swonk. “It is surprising how low the shelter share has remained. It comes from where it was braked. Now the question arises whether it attracts. We have to watch that, but I would have expected more from an increase in the hotel room.” . “

Shelter accounts for more than 30% of the CPI. The Shelter Index rose 0.3% in May and 2.2% over the past 12 months. The rental share rose 0.2% and the home rental index – or the hypothetical amount a homeowner would charge someone to rent their home – rose 0.3%. Out-of-home accommodation rose only 0.4% after rising 7.6% in April.

Another big component, health care, fell 0.1% after rising in the previous four months. Health care prices rose only 0.9% over the past 12 months, the smallest increase since March 1941.

“Healthcare and housing are two very big components of inflation. They are both very persistent and one reason to believe that inflation will settle at higher levels, but not at uncomfortable levels,” said Zandi. “The reason for being so optimistic is because of medical care and housing.” He said expanding the Affordable Care Act helped cut medical costs.

The rise in inflation is stronger than expected, but it still looks like it is in transition categories.

John Briggs

NatWest Markets

Grant Thornton’s Swonk said she wasn’t expecting much from the Fed next week, and the inflation report won’t change that.

“The long bond’s remarkable resilience – it gives the Fed a chance to think about tapering because financial markets are buying it as a temporary surge in inflation,” Swonk said, referring to the 30-year treasury.

Investors have bought the 10- and 30-year government bonds since last week’s weaker-than-expected job report in May. The 30 year yield has fallen to 2.16%. Bond yields move in the opposite direction to prices.

Right now, investors aren’t afraid the Fed will step in any sooner, but Swonk says there might still be a few more hot inflation reports.

“It’s higher than [Fed officials] Would like to. It surprised upstairs. I suspect it will take longer than expected. I expect it to last longer and be hotter but still go away, “she said.

However, she continues to expect the Fed to wait until the end of the summer to talk about changing its bond purchases.

“I always expected that when we met in Jackson Hole, the talks about the reduction would start more openly. That didn’t change my mind. Some people thought the Fed was getting closer to full employment before starting the cut, ”Swonk said.

She said that some of the data in the CPI report is consistent with the job data. The economy created 559,000 jobs in May, around 100,000 fewer than expected.

“If you look at the combination of events – used car prices, vehicle insurance costs, all of these things have accelerated and now they are recovering. The prices at the pump are over 50% higher than a year ago, ”said Swonk. “All of this makes it difficult for workers to find low-wage jobs.”