Zinger Key Points
- Stagflation is a real risk for the U.S. economy, says Quadratic Capital Management's Nancy Davis.
- "Clearly there is a level of interest rates that would push inflation back to the Fed’s 2% inflation target."
The SPDR S&P 500 ETF Trust SPY SPY traded lower by 2% on Friday morning after the Labor Department reported an 8.6% increase in the consumer price index in the month, the highest inflation reading in any month since 1981.
What Happened: The headline CPI rose 8.6% in May, up from 8.3% in April and exceeding the previous 2022 high of 8.5% in March. The May CPI reading came in well above economist estimates of 8.3%.
Core inflation, which excludes volatile food and energy prices, was up 6% in April, above economist estimates of a 5.9% gain.
The Labor Department said shelter, gasoline, and food were the largest contributors to surging prices.
Food prices were up 1.2% month-over-month and 10.1% compared to a year ago. Energy prices were up 3.9% in May and 34.6% over the last 12 months. Used car prices were up 1.8% on a monthly basis and are up 16.1% from a year ago.
The latest CPI inflation reading comes after the Labor Department reported earlier this month that U.S. wages grew 5.2% year-over-year in May. Unfortunately, the latest inflation numbers suggest prices are rising faster than wages for many Americans.
Voices From The Street: Sean Bandazian, senior investment analyst at Cornerstone Wealth, said the CPI reading was "stunningly high."
"How high these numbers remain through the summer ahead of the fall FOMC meetings is crucial and will likely determine if we see a continued path of 50 basis point hikes and a hard landing," Bandazian said.
Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund IVOL, said stagflation is becoming a real risk for the U.S. economy.
"Clearly there is a level of interest rates that would push inflation back to the Fed’s 2% inflation target, but there are serious questions on how long it would take to return to that level of inflation and how much pain we must endure to get there," Davis said.
Bill Adams, chief economist for Comerica Bank, said inflation remains stubbornly high, putting the Fed in a difficult situation.
"The persistence of high inflation in May bolsters the argument for additional half percentage point rate hikes after July, and weakens the argument for a pause in hikes in September," Adams said.
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