After having shown some signs of easing in April, headline inflation reversed course and accelerated to a new multi-decade high in May. Unfortunately, the recent move higher in energy prices will only exacerbate the problem over the near-term, and keep sustained upward pressure on the headline measure through the summer months.
The broad-based acceleration in core goods prices came as a surprise, particularly after having shown some signs of softening in recent months. With many big box retailers reportedly carrying excess inventory, and consumer demand already showing some signs of pivoting towards more service-based consumption, we'll likely start to see some discounting in seasonal items in the months ahead – helping to ease some of the price pressures on select core goods items.
The job ahead for the FOMC is not an enviable one. Inflation pressures are proving to be both more persistent and far-reaching than previously thought, implying more policy action will need to be taken in the months ahead. We expect the Federal Reserve to raise rates by an additional 50bps next week (taking the policy rate to 1.5%) and also signal more 50bps moves to come through the second half of the year. -TD Securities
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