Experts React To 5% CPI Inflation, Highest Since 2008

The SPDR S&P 500 ETF Trust SPY traded higher by 0.5% on Thursday morning after the Labor Department reported a 5% increase in the consumer price index in the month of May, the fastest inflation growth since the summer of 2008.

What Happened: The headline CPI index rose 5% in May, exceeding economist estimates of 4.7% and marking the highest growth rate since the CPI gained 5.3% in August 2008, just prior to the financial crisis.

Core inflation, which excluded volatile food and energy prices, was up 3.8% in May, its sharpest increase in 29 years.

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A spike in used car prices was one of the major inflation drivers in the month. Used car and truck prices increased by 7.3% in May and are up 29.7% over the past 12 months. New vehicle prices were also up 1.6% month-over-month and are now 3.3% higher in the last year.

In addition to the CPI inflation reading on Thursday morning, the Labor Department reported 376,000 initial jobless claims for the week ending June 5. The jobless claims number exceeded the 370,000 claims economists were expecting, but it marked the sixth consecutive week of declines as U.S. economic activity ramps back up.

Fed Watching Closely: Cliff Hodge, chief investment officer for Cornerstone Wealth, said the May CPI number certainly has the Fed’s attention.

“It will still likely be chalked up to transitory base effects, but the CPI print alongside recent releases on higher wages will only turn up the volume on taper talk,” Hodge said.

Charlie Ripley, senior investment strategist for Allianz Investment Management, said the Federal Reserve will likely continue to monitor the situation closely for signs the economy may be overheating.

“Figures like today’s CPI will certainly be raising eyebrows at the Fed, but the bottom line is they will likely need additional evidence to determine whether upward inflation pressures will be more persistent,” Ripley said.

Is Inflation Transitory Or Permanent? Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said year-over-year price growth off last year’s pandemic levels isn’t particularly concerning, but month-over-month price growth could potentially be a problem.

“It’s easy to see that a burst in consumer spending is a likely outcome as everyone tries to get back to their pre-pandemic lives, but it’s questionable that once people start paying higher prices and, as more people come back into the workforce, people begin getting paid higher wages, how any of those increases will ever be rolled back,” Zaccarelli said.

Anu Gaggar, senior global investment analyst for Commonwealth Financial Network, said investors should monitor the bond market for potential inflation warning signs.

“The 10-yr Treasury yield is back at levels last seen in early March, signaling that the bond market is falling in line with the Fed’s thinking that inflation is transitory and does not warrant tapering of monetary stimulus any time soon,” Gaggar said.

Benzinga’s Take: Wall Street certainly doesn’t seem concerned about hyperinflation given the S&P 500 was up 0.5% to new all-time highs on Thursday morning.

The bond market is pricing in just a 2.8% chance of a Fed interest rate hike by the end of the year, according to CME Group.