US Core Inflation Hits 29-Year High... Time for the Fed Again

CPI Including Food and Energy Hits Highest in 13 Years... Increased Likelihood of Starting Asset Purchase Reduction Discussions

[Asia Economy New York=Correspondents Baek Jong-min and Park Byung-hee] On the 10th (local time), as the U.S. May core Consumer Price Index (CPI) inflation rate surged to the highest level in 29 years, analysis is emerging that the possibility of monetary policy tightening by the U.S. central bank, the Federal Reserve (Fed), has increased.

On the day, The Wall Street Journal (WSJ) reported, "The surge in inflation is further prompting a shift in Fed monetary policy," adding that it is becoming the basis for starting discussions on tapering asset purchases at the Federal Open Market Committee (FOMC) meeting scheduled for the 15th-16th.

The U.S. Department of Labor announced that the May core CPI inflation rate recorded 3.8%, the highest since 1992. The core CPI excludes the volatile food and energy items, allowing for observation of the trend in prices. The May core CPI inflation rate not only rose sharply from April’s 3.0% but also exceeded the 3.4% forecast by economists compiled by Dow Jones. The 3.8% figure is nearly double the Fed’s monetary policy target of 2%. The overall CPI inflation rate, including food and energy items, also rose significantly to 5.0%, up from 4.2% in April and surpassing the forecast of 4.7%.

Fed Chair Jerome Powell has so far maintained the stance that the recent price increases are temporary and that the Fed needs to maintain its current zero interest rate and quantitative easing policies a bit longer. This is based on the expectation that the bottlenecks driving inflation will be resolved over time.

However, doubts about whether the inflation is truly temporary have increased following the May CPI announcement. WSJ reported that voices suggesting inflation may not be temporary are growing louder.

Former Fed Vice Chair Donald Kohn stated that the current inflation, supply chain bottlenecks, and employment situation are deviating from his expectations. Kohn pointed out, "Fundamentally, the supply and demand balance may not stabilize as quickly as expected," adding, "This could be a warning sign of inflation risk."

Particularly noteworthy is the unusual wage growth. Unlike other price indicators, wages continuously affect the CPI.

According to the Department of Labor, the U.S. hourly wage growth rate in May was 0.5%, significantly exceeding the economist forecast of 0.2%. The April growth rate reversed the expected 0% and rose by 0.7%. Wages have thus increased sharply for two consecutive months. Mark Carney, who served as Governor of the Bank of England (BOE) from 2013 to 2020, expressed concern that "inflationary pressures related to the U.S. labor market may not be short-lived." William Dudley, former President of the New York Fed from 2009 to 2018, also pointed out that "increased corporate demand for labor and rising wages create conditions for long-term and structural inflation."

Despite the sharp rise in May CPI, the market still appears to trust the Fed’s judgment that "inflation is temporary." On the day, the yield on the U.S. 10-year Treasury note fell to 1.44%. Although it briefly rose to the 1.5% range immediately after the Department of Labor released the May CPI, it soon returned to a downward trend. The 10-year Treasury yield had surged from the 0.9% range at the beginning of the year to the 1.7% range amid growing inflation concerns. As Treasury yields declined, the breakeven inflation rate?calculated by the difference between the 10-year Treasury yield and the 10-year Treasury Inflation-Protected Securities (TIPS) yield?also fell intraday to 2.326%, the lowest in two months.

This content was produced with the assistance of AI translation services.