Inflation rose 8.6% in May which was worse than expected, leading to a nasty selloff on Wall Street. From Thursday at noon to Friday's open, the S&P 500 (NYSE: SPY) was down by about 6.5% and effectively wiping away the bulk of the gains from the oversold bounce in May.
Higher inflation is not what the market wanted to see as there was some hope, following last month's number that the gauge may have peaked. This will likely lead the Federal Reserve to lean in a more hawkish direction and immediately after the report, odds of a 75 basis point hike increased and the odds of a pause at the September meeting plummeted. Another bearish development was an increase in the Fed's terminal rate to 3.25% from 3% prior.
The 8.6% reading was also the most since December 1981, while core inflation rose 6%. The biggest contributors were food, energy, and fuel prices. Stickier components also rose such as shelter and services, increasing the risk of a spiral that could force the Fed to tighten more aggressively. The shock was bigger on a monthly basis with the headline number at 1% vs expectations of 0.7% and core inflation at 0.6% vs expectations of 0.5%.
Energy prices were up 3.9% on a monthly level and 34.5% on an annual level with fuel inflation up a staggering 106.7% over the past year. Rents also rose at the fastest pace since February 1991 at 5.5% over the past year and 0.6% on a monthly basis. Food prices also were up 10.1% annually and 1.2% vs last month.
Other notable categories included airfares which were up 12.6% on a monthly basis, used car and trucks which were higher by 1.8%, and dairy products which saw a 2.9% increase compared to last month.
As a result of these gains, real wages were once again negative with the 0.3% increase in wages negated by the 0.6% rise in prices.
Overall, this report reduced hopes that inflation was peaking and likely to fall on its own. Also, there's been some significant slowing in parts of the economy including housing, but it's not translating into lower inflation which means more economic pain is likely.