CPI Report: Inflation soars to highest level since 2023

[00:00:00] Julie Hyman: Welcome to Yahoo Finance's special coverage of the May CPI report. I'm Julie Hyman. Let's run through the estimates here for this report coming to us in five minutes. Headline CPI likely grew a half a percent in May. If you strip out those more volatile food and energy prices, economists are looking for a gain of 0.3%. Year over year, we could get a CPI number of 4.2% for May on the headline and 2.9% on the core. So we're going to be watching those numbers very, very closely because this could be the first 4% or more reading for that headline inflation number going back to May 2023. Let's talk more about the anticipation and expectations for the report. Claudia Somm is joining me now. New Century Advisors, Chief Economist, and former Federal Reserve Board Economist. And Andrew Szerowski, Morgan Stanley, Investment Management Portfolio, Strategic Income Portfolio Manager. Thank you both for being here. Let's just get a couple of quick comments from each of you before we get the numbers. Claudia, I want to start with you. How serious is it that we could be seeing this 4% reading on your rear headline? [00:01:12] Claudia Somm: Yeah, so it is clearly a discouraging milestone, right? Like, we've made a lot of progress back down after the pandemic inflation. And not only inflation is elevated, it is moving in the wrong direction. So I think that it doesn't necessarily set off all the alarm bells. Like, this is not necessarily, you know, a repeat of that recent history. But it certainly causes concern and raises the risk that we could be back into an inflation period. [00:01:39] Julie Hyman: And certainly the sentiment out there feels that way, right? Not just the sentiment on Main Street, but, Andrew, the sentiment to some extent on the market, on Wall Street, too. Especially if you look at the bond market, which, of course, you track closely here, and look at what yields have been doing. [00:01:58] Andrew Szerowski: Yeah, no, as you mentioned, Julie, look, the bond market's gone from pricing in three cuts earlier this year, as recently as February, to pricing in almost two hikes. So there's been a dramatic turnaround at not just the front end, but throughout the whole curve. And that's obviously heavily related to what's going on in the Middle East. But also, it's trickling through to other parts of inflation. And it's something that's got investors concerned. Concerned so much that the inevitable that we thought was never going to happen was hikes being put on the table. And that's something that's kind of spooking bond investors. And you're seeing that all those gains that we had as of February kind of wiped out over the last three months. [00:02:36] Julie Hyman: Andrew, do you guys there, Morgan Silley, think that there is going to be a hike this year? [00:02:42] Andrew Szerowski: Look, I think Kevin Warsh is certainly in a tough spot starting his new career as the Fed chair. I don't think that the Fed's ultimately going to hike rates. I think that in the short term, they're going to pause. And the reason being is because I think that wage inflation is going to allow the Fed to remain on pause. So as high as inflation's been, on the other side of the table, we've had kind of decelerating wage inflation. So you've had negative real wages. So I think the Fed's going to be able to kind of sit and wait because of that. And so we don't think they're going to hike in the short term. We think that the market's kind of overpricing how the Fed will react to this. And it's because of the labor market that we think they'll be able to do so. [00:03:20] Julie Hyman: Claudia, what do you think? [00:03:23] Claudia Somm: So I would generally agree with that. I would say, though, I mean, the wild card, and this has been true for months now, is the path of energy prices. Right. So that is so much contingent. There are definitely scenarios where you could put the Fed on a path to hiking by the fall. And there are ones where, you know, we might be even in the direction of a cut. I think that's much less likely now. But there's just so much uncertainty about the path of the economy, which means then the Fed is really second order to that. Right. What does the Fed do? So I think we're in a situation where, you know, right now it makes sense for the Fed to be on pause, gather more information. I totally agree the labor market is not heating up in a way that the Fed needs to move now. But I also think this is a Fed that probably will not be as patient as they were back in 2021 when inflation was rising. [00:04:07] Julie Hyman: Interesting. Some lessons learned, perhaps, a little PTSD, perhaps, on part of some of the Fed members who have been around for a while. Guys, I'm going to get you to hold on because the numbers are coming our way in just a moment. I should mention futures are trading lower going into this. And, of course, we've had sort of a return of volatility over the past week or so, particularly when it comes to that AI and tech trade. As you can see, NASDAQ futures are indicating a steeper drop than the other major averages. But, of course, all of that could change once we get the number in a couple of moments here. So we've also been continuing to see that sort of persistence of yield pressure, right, with the 10-year yield sort of hovering at 4.5% or above and the 30-year yield hovering at 5% and above. Those have been levels that have been also sort of problematic for the equity market here. So we should be getting these numbers 0.5%, a half a percent is indeed the CPI month-over-month number that we've got two-tenths of 1% on core and right in line with estimates on the year-over-year numbers. In other words, year-over-year inflation on the consumer level rising 4.2% headline. If you strip out those volatile food and energy costs, you get a gain of 2.9%. So this is all almost exactly what we were anticipating, except one perhaps reassuring note in here. Again, that core month-over-month rise in CPI 0.2%, half the gain that we saw in April, and a tenth of a percent better than economists had been looking for on average. So that perhaps a more encouraging number here. I'm going to, once I can get the BLS site to refresh, I'm going to go in and start to get some of the individual components here. Gasoline, obviously, a part of this. We were, as we talked about, we were going to be watching that number quite closely. I'm going to start to go in and, again, look at these components. But I want to bring Claudia and Andrew back in while I have them. I'm sure you're doing the same thing I'm doing and looking at the BLS site and trying to figure out where these pressures came from. But, Claudia, are you reassured by that two-tenths of a percent gain on the core month-over-month? [00:06:19] Claudia Somm: So we'll take whatever we can get for good news. I mean, I wouldn't want to overstate it. I think this largely came in as expected. But it does, that gap between overall and core, I think, is worth pointing out. Because really what is driving an important part of this reacceleration inflation, it is in those energy prices. I mean, it is the conflict in the Middle East. That's not the only thing pushing up inflation right now. But I think it's important to understand we've got some real outliers, some shocks. Now, we're early days in the energy shock playing out. So we don't want to take this lightly. But the worst case scenario would be the energy shocks are here and they're starting to spill over into core. And that's not the message that we're getting today in these data. So it's important to keep an eye on that. But we don't have the, like, breaths of inflation heating up. We've got some shocks that are really problematic. But they're not, at this point, haven't been spreading. So that is good news. [00:07:11] Julie Hyman: And now that I have the screen up in front of me, just to run through some of those components, some of those inputs that you're talking about. So energy, indeed, month over month, up 3.9%. But, of course, the gains have been especially acute in gasoline, which saw a 7% gain month over month. Fuel oil up 3.8%. Electricity still rising, although at a more moderate rate of 0.6% of 1%. So that also perhaps a good news. The other thing that is a change month on month is we had been seeing sort of food inflation start to heat up, grocery inflation starting to heat up a little bit. That also decelerated in May. 0.2% was the increase. It had been a half a percent in April. Again, I'm going to look at the more detailed components to see how that breaks down. But, like, there were things like a big spike in prices of tomatoes, for example, because of some agricultural changes, right, weather, et cetera. And then we'll continue to watch what's going on with beef prices, especially now that we have screw worm detected in Texas. And that's a big concern for the beef industry. So there are sort of some idiosyncratic inputs into the food situation. But, Andrew, how are you reading this number? And also importantly, how do you think the bond market's going to read this number? [00:08:25] Andrew Szerowski: I think the bond market was basically expecting when you look at where kind of headlining core shook out. Obviously, core came in a little lower on a rounded basis. But I think it was basically in line with expectations. I think when you as you're pointing to the various components, you know, you look at airfares and they're up 27% year over year. They continue to rise. I think one of the things is if if if oil kind of just stay here, we peaked in gasoline and oil prices in towards the end. So this should be the peak in inflation if there's no kind of reacceleration in oil prices, which is a big if, obviously, this war in Iran, we're not sure if it's going to be ending in weeks or months. But as of now, oil has kind of come off its peak. And and it's it's more than just oil prices, because obviously that that translates through to shipping costs, which infects food and and other goods and services. And so that's something that I think is that's been the challenge on the back of this. We also have that we had kind of tariff inflation that we're just kind of finishing, kind of rolling into various components of inflation. So I think that the Fed was in a great spot coming into 2025 or 26 before this all played out. But you had inflation that was trending back towards 2 percent. And now, obviously, they're at 2x their target on headline here. And so I think the bond market, again, it wants to see an end to the to the war in the Middle East, because as Claudia mentioned, oil is the biggest driver of what's going on here. [00:09:53] Julie Hyman: So, Claudia, oil may be the biggest driver. I was going back just for fun to look at, you know, kind of the trajectory, refreshing my memory of where we've seen the headline CPI number. Right. And the last time, as I mentioned, it started with 4 percent was back in May of 2023. It had peaked, of course, at 9.1 percent in June 2022. The lowest it got was 2.3 percent in April 2025, which is a while ago now. And so even before, in other words, this current spike in oil prices, you know, we sort of had the we weren't necessarily going in the right direction consistently enough. So how do you then think about oil as the big pressure here versus those underlying trends that you were talking about? [00:10:40] Claudia Somm: Right. So we have seen in the last six years a whole series of supply shocks, you know, hitting the economy. There were several in the pandemic. And then, you know, talk about the last of the low we got on on overall inflation, April of 2025. What happened in April of 2025? That was Liberation Day. Then the tariffs came in, which is a cost shock that feeds its way through. We're working our way through that. You have, you know, the energy shock with the Middle East. And I think we've seen some signs and even the consumer price data of some of the AI build out, chip shortages, kind of AI. Like there's there's just so much going on and we're starting to layer these shocks on top of each other, which I think is what's been enough to give that that lift to inflation. You know, we've just been kind of moving sideways. Right. But now we're actually lifting. And so there's just been a lot going on under the hood. It doesn't excuse like the path. I mean, price levels are rising. But I think it's been a really complicated environment where you can have a bunch of one-off shocks, but they add up over time. [00:11:36] Julie Hyman: Well, and at what point do you just say supply shocks are normal? And so you have to account for that when you're setting monetary policy. [00:11:46] Claudia Somm: Right. That is that's going to be a big debate that this Fed is going to have. And I think, you know, typically you look through supply shocks, but life has been anything but typical in the last six years. And I think there's been a discussion among policymakers really about this aspect of duration, like how long inflation stays elevated. And again, I don't think the Fed is at a place where they're going to be raising rates like right now or real soon. But they're having this discussion because this is really dragging on and it comes at a cost. These higher prices do hurt people. [00:12:16] Julie Hyman: Yes, indeed they do. All right, guys, I'm going to ask you to pause for just a second. And I want to take it over to our markets editor, Jared Blickery, for more of a detailed look at what we're seeing in terms of market reaction. Jared? [00:12:26] Speaker 4: Thank you, Julie. Well, we began the morning before the report risk off. And so we're seeing a little bit of change here. But let me just go straight to the charts. Here's the S&P 500 futures. Here was the low right around 7.30 a.m. And you can see got a little bit of liftoff after the report, pairing some of those losses. But I think it's instructive that the market was under pressure quite a bit yesterday. We had a huge rally into the close, saved what would have been another really ugly day for tech. It wasn't pretty, but it could have been ugly. NASDAQ down two-thirds of a percent. Russell, 2,000 a little bit less than that. And the Dow off about half of 1%. We'll take a quick look at what the bond market is doing, which is not much right now. This is the two-year U.S. Treasury note futures. So you can see almost break even here from yesterday's close, but a little bit elevated. That means that the two-year yield ticking down just a little bit. And let's get to the 10-year as well. And we can see that's pretty much in the same camp, down a little bit, which means the yield on the 10-year popping up a little bit, but nothing to write home about. We'll take a look at gold futures, which have been depressed recently. You can see they were already underwater. This goes back to midnight eastern time, down 2.27%. A little bit of a lift off the report, but not much. In terms of the Fed futures, I saw the bond market pricing in. Not much of a change for December. We're still expecting one rate hike in December. A little bit of a lower odd of a rate hike in October right now, but very little change. I want to show you what's going on with the VIX. Now, the VIX opens up right around Europe, so it's been trading for several hours right now. This is since midnight, and you can see it's up to 21.88. This is a 10-day look at the VIX, and this is last Friday's little scare where we had chip stocks really selling off hard. This was the other day, and here we are again. So it looks like the VIX is kind of turning up again. Here's a year-to-date chart. Here's that big Iran war premium that we saw baked in the market. That hit, what, over 30 right there. So we're nowhere near that yet, but it looks like the VIX is turning up a little bit. So there's some caution that we're seeing broadcast in the market. Now, if we take a look at the S&P 500 sectors, this is what happened yesterday. Real estate was in the lead up over 2%. Tech was dead last. Now I'm going to put the overnight market chart or overnight quotes on here. You can see in the pre-market, energy is up about 0.5%. It's leading. Then you've got staples, then utilities. So that's a pretty defensive setup for those sectors that are in the green here. What is not working again? That is tech. So materials and tech, both changing places here. They're each down about 0.9%. And I'm going to show you our software screen. There's a lot going on here. The background, again, is what happened yesterday. And those little rectangles are what's happening this morning. But I just want to show you. We got a bunch of names on the bottom row, from SAP all the way to Atlassian, to Unity. All those down about 3%, 4%, 5% in the pre-market. Chips looking a little bit better, but still seeing some depressed prices. NVIDIA down 1.4% in the pre-market. Taiwan Semi down 2%. Micron down 1.7%. I actually want to close with the futures and just take a quick look at crude oil here. Because crude oil, I'm going to show you a longer term chart, and I'll go to a year-to-date. And I'll put some candlesticks on here so I can show you. We are at the very bottom end, or closing in on the bottom end of this trading range, which is right around $90. Now, it's dipped as low as $80, which it could do again. But it's just been going sideways here. And when you get to the bottom end, you've got to think. We're either going to break through that, or we're going to go back up and test the top. And when we go back and test the top, which it looks like it might want to do right now, that can put some additional pressure on equities. Back to you, Julia. [00:16:07] Julie Hyman: Thank you so much, Jared. I appreciate it. By the way, talking of tech, we were expecting to see some pressure on some tech items in here because of chip pricing, computer software, and accessories up 14.5% year-over-year. We'll get more details when we get the PPI report and see exactly what's going on with those memory chip prices. Andrew, you just heard Jared talk about how we're not seeing a lot of change in the bond market this morning. Is there anything you see in this report that changes the outlook or changes fundamentally how we're going to maybe see bonds go from here? [00:16:37] Andrew Szerowski: Look, I think there's some positives in this report when you dig into the details. And one of those big positives is the largest component of CPI, which is shelter. And shelter inflation, it's been stubbornly high for years, but it's been coming down. And it's a bit of a lagging indicator when you look compared to other rent indices like the Zillow Rent Index or the Apartment Rent Index. But owner's equivalent rent, because of technical reasons, last month had this big spike because of the government shutdown and kind of basically recollecting that data from October. And so that's a positive. If you look, you're seeing kind of new auto prices and auto insurance prices, which we know spiked coming out of the pandemic. Those are coming down. And there's a big lag between insurance prices, about a 12-month lag between insurance prices and vehicle prices. And vehicle prices are coming down. So that should be a positive going forward. So I would say that those are big components in CPI. That's something that's a positive and the Fed can kind of look at and say, OK, it's not bleeding through to kind of this so badly to goods prices that it's getting away from us. Again, oil is the big driver here. The Fed historically doesn't respond to supply shocks. But again, we know this is, as Claudia mentioned, it's been one shock after another. And we don't know if the next shock will be a positive or a negative. But I think that the one thing that they can continue to lean on, which is that real wages are negative. They're negative 0.7%. If we have 3.4% wage growth and 4.2% inflation, negative 0.8%. And so at some point, the consumer is going to have to meet these higher prices with demand destruction. And we think that's now. And so that's something. This isn't 2022 where you had 6% to 8% wage gains when inflation was soaring. The consumer could handle that then, plus stimulus checks and other things. So I think that's why the Fed has a little extra time. Again, we know these shocks continue to kind of roll through. But it gives them a little more time. [00:18:32] Julie Hyman: Claudia, just really quickly here. What do you think Kevin Warsh's then biggest challenge is going to be? [00:18:38] Claudia Somm: The list is long. I mean, you know, he's a new Fed chair. He's got a big agenda. It's going to be really interesting to see how when he steps up to the mic, hopefully he steps up to the mic next week and kind of lays out his vision. I think communication is going to be so critical at a moment like this when there's so much uncertainty. So, you know, I'm rooting for him. [00:18:57] Julie Hyman: I think the market is too, at least in some way. Claudia, Andrew, thank you so much for joining us. We really appreciate it. And as we watch what's going on with the futures here this morning, Jared was just telling us, of course, going into this report, we were seeing some pressure. There is less pressure in the futures market right now. NASDAQ futures is still indicating a drop of 7 tenths of 1% and really what has been pivotal for the market, more so than the short-term rate outlook has and what's going on with the AI trade. It hasn't been working as well over the past week. Of course, we'll be talking much more about all of this. Stay tuned. The Morning Brief is coming up at 9 a.m. Eastern. We'll have more coverage on the CPI report, on the markets, and everything else we're watching.