On Wednesday, I noted that headline inflation in April was tempered by a BLS-measured decline in gasoline prices, and May would not have that benefit. The monthly growth rate for most non-energy prices from April’s report either held steady or accelerated, and without lower gasoline prices to compensate, things could get ugly.
Now, May’s report is out, and it’s the same story for non-energy prices, with energy prices increasing as well. Groceries are up 11.9 percent year-over-year and 1.4 percent month-over-month. It’s not just food and energy (as if that weren’t already bad enough). The index for all items less food and energy went up another 0.6 percent in May, which is the same as it did in April.
In fact, the gasoline-price increase is likely understated on May’s report. According to Energy Information Administration data, gas prices were up about 11 percent over the course of May. The BLS only records a 4.1 percent increase. The BLS uses a totally different data-collection methodology than the EIA, and they both use a different methodology than AAA or other non-government sources of gas-price data. The important thing is that the BLS is consistently using the same method, so month-to-month comparisons between inflation reports are reliable.
But for the prices Americans are actually paying, it matters whether gas is up 11 percent or 4.1 percent, and we have every reason to believe things will get worse this summer. According to GasBuddy data, the average price of gasoline has increased by about 8 percent over the past twelve days. That’s the last two days of May and the first ten days of June: None of it showed up on this inflation report, which is for May. JP Morgan analysts predicted in mid May that gas prices could reach $6.20 by August.
But again, look at the non-energy prices in this month’s report. They aren’t slowing down, either. “All six major grocery store food groups indexes rose in May,” the BLS says. For all items less food and energy, “The increase was broad-based, reflecting advances in almost all major component indexes.” Nobody can blame energy-market turmoil for distorting the picture.
At the last FOMC meeting, the Fed increased rates by 50 basis points instead of 25. The headlines read “largest interest-rate increase since 2000” and the economy was supposed to be spooked. The Fed was getting serious about fighting inflation, we were told.
I wrote at the time that 50 basis points wasn’t enough. Today’s inflation report provide evidence to support that the Fed’s credibility is eroding. When the headlines read “historic interest-rate increase” and inflation only becomes more entrenched a month later, it should be a flashing red light to central bankers.
The FOMC’s next meeting is in a few days. Markets are already pricing in a 50 basis-point increase. The Fed needs to go higher than that. It should go with 75 basis points at least. A whole percentage point would be even better. If you think that’s radical, consider that a one-percentage-point increase in the federal funds rate would take it to 2 percent. With inflation over 8 percent, that means real interest rates would still be around -6 percent. A straightforward application of the Taylor rule, for example, would put the target federal funds rate much higher than 2 percent.
Jerome Powell wants to talk about a “soft landing,” but before we talk about how the landing is going to feel, we have to begin our descent. We haven’t yet. And the longer we wait to begin our descent, the harder the landing will have to be.