The S&P 500 hit another all-time high last week with a tailwind from better-than-expected consumer inflation (CPI) readings and lower bond yields. While the Federal Reserve sounded a more hawkish tone on the surface, there are reasons to doubt that this stance will continue much longer.
May CPI declined to 3.3% year-over-year, below consensus estimates and April’s 3.4%. Perhaps more importantly, the CPI supercore, which measures services inflation excluding housing, finally broke its relentless upward year-to-date trend. Wage pressures heavily influence Supercore CPI since services have a significant labor component, so it is welcome news that this inflation driver might be easing. Less importantly but still notable, May producer price inflation (PPI) was also less than expected, so that portion of possible cost-push inflation looked tame.
Diving into the month-over-month inflation data shows similarly helpful readings. The headline CPI level was tied with the unchanged reading in July 2022 and the lowest since May 2020. Core CPI, excluding food and energy, was the lowest month-over-month since August 2021. Until May, the supercore CPI hadn’t posted a negative month-over-month reading since September 2021.
The Cleveland Fed’s estimate of future CPI fell to 3.15%, indicating that more progress toward our 2% inflation target is expected.
The Federal Reserve (Fed) met on the same day the better-than-expected CPI report was released and concluded with a relatively hawkish outcome. While keeping short-term interest rates unchanged as expected, the Fed’s median projection is now for
