By Elliott D. Pollack & Company
Inflation is moving in the wrong direction. The Consumer Price Index rose 4.2% over the past twelve months in May, the fastest pace since April 2023 and a sharp acceleration from 3.8% in April. The latest CPI dropped on June 10, just six days before the Federal Reserve begins its June policy meeting, the first under new Chairman Kevin Warsh. Let’s see what happens!
The May report is layered. Energy prices, elevated by disruptions tied to ongoing global tensions, led the monthly surge. The good news is that core inflation (removes food and energy costs and is the gauge the Fed watches most closely) came in at 2.9% year over year, up from 2.8% in April but well below the crisis levels of 2022. Shelter costs, which carry roughly one-third of the CPI’s weight, continue to contribute meaningfully (3.4% YoY). Until rents cool more durably, getting core inflation back toward the Fed’s 2% target will remain a slow process.
The Producer Price Index adds another reason for concern. PPI for final demand rose 6.5% over the past year in May, with a monthly gain of 1.1%. Producer prices often foreshadow consumer prices by several months. If businesses are absorbing higher input costs today, some of that pressure tends to filter through to the CPI in the months ahead. That is not a certainty, but it is a reason to watch the next few inflation reports carefully.
The labor market, for its part, held its own in May. Nonfarm payrolls added 172,000 jobs, in line with the pace of the past two months and ahead of many analyst forecasts. Both March and April payroll counts were revised upward, to 214,000 and 179,000 respectively, suggesting the labor market entered the spring with more momentum than initial reports indicated. The unemployment rate held steady at 4.3%, and average hourly earnings grew 3.4% over the past year. Wage growth in excess of inflation is welcome, but with CPI at 4.2%, the cushion is smaller than it was twelve months ago.
The harder question is what comes next, and the Federal Reserve’s June 16-17 meeting will be the first place to look for answers. Markets widely expect the Fed to hold its target rate range at 3.50 to 3.75%, and the May CPI report supports that view. The more interesting signal will be what Chairman Warsh says about the path forward. We think rate cuts before year-end are increasingly unlikely unless inflation comes down more meaningfully. Consumer sentiment fell to 48.9 in the University of Michigan’s preliminary June survey, near historic lows. Job openings held at 7.6 million in April, and the service sector expanded in May, so the economy is not on the verge of collapse. But inflation at a three-year high, with pipeline pressures still elevated, is not a problem that resolves itself. This bears watching.
U.S. Snapshot
- Nonfarm payrolls added 172,000 jobs in May, above consensus forecasts and consistent with the three-month trend. Revisions were positive: March was raised to 214,000 and April to 179,000. The unemployment rate held at 4.3%, unchanged from April, and average hourly earnings rose 3.4% over the past year.
- The Consumer Price Index rose 4.2% over the past twelve months in May, up from 3.8% in April and the highest reading since April 2023. The monthly gain was 0.5% (seasonally adjusted). Core CPI, excluding food and energy, rose 2.9% year over year, up from 2.8% in April.
- The Producer Price Index for final demand rose 6.5% year over year in May, with a monthly gain of 1.1%. Elevated PPI is a pipeline signal: producers absorbing higher input costs today tend to pass them through to consumers in the months ahead.
- The ISM Services index registered 54.5 in May, up from 52.8 in April. Any reading above 50 signals expansion; at 54.5 the service economy, which represents the largest share of U.S. output, is growing at a solid pace.
- Job openings held at 7.6 million in April, according to the JOLTS report. High openings alongside modest initial claims suggest businesses are still actively hiring rather than shedding workers, a sign of continued labor market resilience.
- The University of Michigan’s preliminary June consumer sentiment index fell to 48.9 from 52.2 in May, a sharp decline to near-historic lows. Elevated prices and uncertainty about the economic outlook appear to be weighing heavily on household confidence.
- The 30-year fixed mortgage rate averaged 6.52% in the week ending June 11, according to Freddie Mac, up from 6.48% the prior week. Rates well above 6% continue to constrain housing affordability and dampen transaction activity across the country.
Arizona Snapshot
- Arizona added 8,100 seasonally adjusted nonfarm jobs in April, the most recent month for which state-level data are available. The state’s seasonally adjusted unemployment rate was 4.7%, up from 4.1% a year earlier. The rise in unemployment, even alongside continued job growth, reflects a labor force that is expanding faster than payrolls, driven by strong in-migration to the state.
- Rising mortgage rates continue to challenge the Arizona housing market. At 6.52% nationally for the 30-year fixed rate, monthly payments on median-priced Phoenix-area homes remain far above pre-2022 levels, limiting the pool of qualified buyers and keeping resale volume soft.
