📝Fed Can No Longer Look Through Price Data: Wells Fargo

The pushback in timing on "peak" inflation comes amid a further climb in energy prices. Gasoline prices rose 4.1% in May but have since catapulted to just shy of $5 per gallon nationally which points to an even larger monthly gain in June. Utility bills are also on the rise. Costs for energy services (electricity and piped gas) increased 3.0% in May and are likely to climb further amid the steep rise in natural gas prices and still unseasonably-low inventories. Meanwhile, food inflation remains unrelenting. Grocery prices shot up another 1.4%, bringing the one-year rise to 11.9%—a rate unseen since the 1970s. Prices for food away from home did not increase quite as much but were still up a robust 0.7% in May.

Tighter monetary policy will not help much with surging global commodity prices or structural changes in the way people spend and live in the post-pandemic economy. That said, monthly core CPI inflation has been 0.5% or higher in seven of the past eight months. These monthly readings roughly translate to a 6%-7% pace of annualized core inflation. There was a period of time when top policymakers at the Fed would look through this, but we no longer believe that is the case. Until inflation is demonstrably on the downswing, we expect the FOMC to fight back with tighter policy. Another 50 bps rate hike is all but assured at next week's FOMC meeting, and a couple more 50 bps hikes in July and September seem highly likely.

-Wells Fargo Economics