There is no silver lining: May's inflation report is a disaster for the "soft landing" camp — policymakers and politicians hoping to tame inflation without an all-out recession. Prices rose 1% alone during the month, bringing the year-over-year increase to a fresh four-decade high.
Why it matters: The Fed will likely have to take more aggressive steps to cool demand broadly in the economy to tackle worsening inflation, which amplifies the risk of a sharp economic downturn.
- What the central bank will do after a summer of half-point hikes is no longer a mystery: another half-percentage point interest rate hike in September now looks likely.
- Traders are pricing that in: The yield on the 2-year Treasury note jumped to its highest levels since 2008, a sign traders are bracing for more aggressive tightening in the near-term.
The big picture: Those who believed inflation peaked earlier this year woke up to a rude awakening. Price gains stayed hot — and re-accelerated, in some cases — in nearly all categories.
- Housing: The shelter index rose 0.6%, the single-biggest monthly increase in 18 years.
- Not since 1981 have food costs seen a bigger annual increase. The food index rose 10.1% from the prior year.
- Used car prices rose 1.8% — the first acceleration in three months.
What they're saying: "Stepping back, we are struck by the fact that there were almost no pockets of weakness in this report," said Aditya Bhave and Meghan Swiber of Bank of America Securities, in a note.
Between the lines: Fed officials have emphasized in recent weeks that they need to see concrete evidence of overall inflation rates falling before relenting on their tightening campaign — that forecasts and excuses won't cut it.
- "We doubt that the Fed will be feeling in a mood to parse fine details here," wrote Peter Williams and Krishna Guha of Evercore ISI in a note.
- "The big picture is simply that inflation is still way too high, and policy will need to stay resolutely focused on bringing it down."
The Biden administration is pointing to Russia's invasion of Ukraine, which has disrupted the global energy and food markets. The pandemic-related lockdown in China put pressure on car prices.
The bottom line: Americans are feeling the squeeze from an "everything-is-expensive" economy. They are bracing for an economic downturn — and the chances of one just got higher.
