Global Recession on the Horizon?

Macro Markets

CPI

The Consumer Price Index (CPI) revealed headline inflation rose 0.1% over last month and 4% over the prior year in May, a slowdown from April's 0.4% month-over-month increase and 4.9% annual gain. Both measures were roughly in line with economist forecasts of a 0.1% month-over-month increase and a 4.1% annual increase, according to data from Bloomberg.

The yearly inflation rate slowed from 4.9% to 4%, marking the lowest since March 2021. Grocery and gas prices have been on the wane after helping drive up inflation last year. Yet the so-called core rate of inflation that omits food and energy rose a stiffer 0.4% for the third month in a row. Wall Street had forecast a 0.4% gain. The Fed views the core rate as a better predictor of inflation trends. The increase in the core rate over the past 12 months slipped to 5.3% from 5.5%, the smallest gain since the fall of 2021. However, these prices have fallen more slowly than the broader CPI, suggesting the fight against inflation is far from over.

Core inflation remained especially sticky last month as rent prices continue to surge. The index for rent and owners' equivalent rent rose 0.5% each. Owners' equivalent rent is the hypothetical rent a homeowner would pay.

The shelter index was the largest factor in the monthly increase of core inflation. The BLS noted that prices for used cars and trucks increased by 4.4%, and motor vehicle insurance increased by 2.0%.

The energy index decreased 11.7% for the 12 months ending in May, while the food index increased 6.7% over the last year. The energy index decreased by 3.6% from April to May on a seasonally adjusted basis, while food prices rose 0.2%. Egg prices fell 13.8% in May after dropping 1.5% in April and 10.9% in March.

FOMC

The Fed is currently meeting to determine its next step in its fight against inflation. The Fed has jacked up a key short-term rate by 5 percentage points since the spring of 2022 from near zero. Now it wants to see how higher borrowing costs affect inflation and economic growth. That’s why many senior Fed officials prefer to skip a rate hike this week. The high inflation rate is far from the Fed’s 2% target, and senior officials think it could take a few years to reach its goal. The big question for the Fed is whether to raise interest rates again. If inflation doesn’t subside more rapidly, however, the Fed might be forced to raise rates again and boost the odds of a recession.

Market odds for the Fed to raise the Fed funds target range by +25 bp at Wednesday’s FOMC meeting stand at 25%. The Fed is most likely going to leave rates unchanged at this meeting.