The Labor Department’s report showed that the consumer price index (CPI) increased 1.0% in May after a 0.3% gain in April. The Dow Jones Industrial Average fell by 880 points or 2.73% to 31,393.79, the S&P 500 lost 116.96 points or 2.91% to 3,900.86 and the NASDAQ Composite lost 414.20 points, or3.52% to 11,340.02. The inflation report was published ahead of an anticipated second 50 basis point rate hike by the Fed this upcoming Wednesday. Another half a percent move is projected for July. There are worries the push to higher rates could result in recession. The major indexes recorded their biggest weekly percentage drops since the week ended Jan 21, with the Dow down 4.58%, the S&P 500 down 5.06%, and the NASDAQ composite losing 5.60%. Stocks have been volatile this year and recent selling has been tied to worries about inflation, rising interest rates, and the probability of a recession.
Consumer prices showed little signs of slowing in May, by rising 1.0%, which came in higher than expected and lifted the year-ago rate to a fresh 40-year record of 8.6%. Price increases were broadly-based, on both goods prices. (+1.3%) and services (+0.8%) contributing to the increase. While most categories recorded price increases in May, energy (+3.9%) and food (+1.2%) are providing most of the inflationary fuel. Still, the core rate rose 0.6% for a second month. The year-ago core reading did fall to 6.0% from 6.2%, suggesting that there is some progress being made in the war on inflation. The news on inflation is mixed, despite the high headline and year-ago numbers. Goods inflation is losing steam as Walmart and Target have been cutting inventories to clear overstocked warehouses. However, service industries are seeing stronger demand, with the result of higher prices at some of these industries, like hotels and airline fares are seeing demand increase, along with price increases. Wage inflation in service industries is becoming more entrenched and threatens to offset the goods provided by lower goods prices.
There is some growing evidence that goods inflation is easing as demand cools and supply chin problems improve. Shipping costs and port backlogs are easing. Monthly commerce from Adobe, recently showed inflation for goods bought online eased in May to a 2% annual rate in May from the March peak of 3.6%. The future of the economy will largely depend on the consumer, who must slow spending to cool inflation, but not run and hide, actions that might lead to a recession. Some economists project a fairly quick fall in inflation forces. Chief Economist Ian Shepherdson from Pantheon Macroeconomics projects a continuation of improving supply chains, a slowing of home price appreciation and the impacts on profits from rising inventories could bring the CPI down to 3% by year’s end. Whether we end up in recession will depend on the Fed knowing when to stop and at that moment will be a difficult decision to make.
Despite sharply higher prices, households have demonstrated uncanny staying power. Consumers are tapping their savings accounts and lowering their monthly savings amount and are using credit cards more frequently. Revolving credit card debt is now above the pre-pandemic level. While using credit cards is not a sustainable long-term driver of consumer spending, it does help out when a gallon of gasoline is over $5.00 a gallon. The truth is, the longer inflation persists and the more the Fed tightens, the more stress is on the consumer. At some point, something will break, inflation, the consumer, or both.
This upcoming week will be busy with economic data, with the focus on PPI inflation, retail sales, industrial production, and housing starts.