Inflation Unexpectedly Reaccelerated to 8.6% in May, Hitting a Fresh Four-Decade High

The most commonly tracked indicator of inflation, the consumer price index (CPI), rose 8.6% in May year-over-year, exceeding expectations that it would fall to 8.2% from April’s 8.3%. The core CPI – which strips out food and energy costs – rose 6% year-over-year in May, dipping from April’s 6.2%, but more than expectations for 5.9%.

The CPI increased 1% in May on a monthly basis. This was more than the 0.7% increase expected and more than three times as much as April’s 0.3% gain. Although the core rate was flat in May compared to April, it rose 0.6% in May. This is higher than expected 0.5%.

For monetary policymakers, who are currently in the middle of a rate-hike cycle but may be looking to a pause later in the year, the unexpected new four-decade high in headline inflation of 8.6% is a problem. The question now is whether the Fed should raise rates by 75 basis point per meeting or the 50 basis points planned.

Bitcoin (BTC) – which, along with nearly all assets – has taken a major hit as western central banks have begun tightening monetary policy over the past few months, has dipped to $29,500 from $30,000 in the minutes after the report. It has remained at a low of 65% relative to its high in the fourth-quarter of 2021.

“There are certainly positive signs that would indicate the worst [on inflation] is behind us,” said Jonathan Silver, founder and CEO of Affinity Solutions, a global insights firm tracking consumer purchasing habits.

“The job market remains strong which is putting money in people’s pockets, however, price increases are still outpacing people’s paychecks. We hope this trend will change as inflation begins to recede. Our purchase spending data suggests that this is the direction we are headed,” he said.

This morning’s inflation report is the last major economic indicator that the Federal Reserve sees before its next meeting on June 14-15, at which the central bank is widely expected to raise its benchmark Federal Funds rate by another 50 basis points, in what would be the third rate hike this year.

Federal Reserve Bank of Atlanta President Raphael Bostic in late May hinted at the possibility of pausing rate hikes in September if inflation moves in the right direction. That was seemingly shot down by Fed Vice Chair Lael Brainard days later who said it’s “very hard to see the case” for any pause in the tightening cycle.

“If we do begin to see a reduction in the CPI number as expected I do think we will see that reflect well within all markets signaling that the tide is beginning to flow in the correct direction and we should see some more risk on investment come back to the markets with both BTC and total market seeing some increased volumes and price action,” Howard Greenberg, cryptocurrency educator at Prosper Trading Academy said.

“A negative number would cause a much bigger downside event than the expected or even a slightly better than expected number has to the upside.”

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