Inflation has elbowed its way to the center of the economic debate—witness the blizzard of comments on the topic from Federal Reserve officials in recent weeks—including some hawkish talk from the central bank's chairman, Ben Bernanke, on June 9.
In a speech at a conference sponsored by the Boston Federal Reserve Bank, the Fed chief said the latest energy price rises have added to upside risks on inflation—and inflation expectations—that the Fed will "strongly resist."
Against that backdrop, the June 13 release of the May consumer price index (CPI) takes on more urgency for financial markets amid increasing sentiment the Fed may tighten rates later this year.
Substantial Upward Pressure on Core Rate
Action Economics expects the May overall CPI to jump 0.5% (in line with economists' median forecast of 0.5%). We expect another big gain in energy prices, although seasonal factors will again counter some of the outsized strength seen in spot oil and gas prices for this month.
As for the core index, which excludes food and energy prices, we expect an increase of 0.2% (median 0.2%), although this index has been surprisingly subdued over the last three months following the big gain in January.
The April data left the headline year-over-year rate at 3.9%, from 4.0% the previous month, while the core year-over-year rate was 2.3%, vs. 2.4%. The core year-over-year rate remains below the recent peak of 2.9% in October, 2006. For May, the headline year-over-year rate should rise back to 4.0%, and we expect this gauge to trend upward to the 5.0%-to-5.5% range by August, leaving substantial upward pressure on core inflation going forward.
Soaring prices have become an increasing focus at the Fed despite growth concerns and troubles in the credit markets, and is indicative of the central bank's shift to a neutral policy stance at the Apr. 29-30 FOMC meeting.
We expect the Fed to maintain its 2% funds target at its June 24-25 policy meeting, although we look for a shift in its bias toward inflation, given Bernanke's comments. This shift in Fed rhetoric may signal that policymakers are looking to initiate a tightening cycle as soon as August.