US: Inflation remains far too high for the Fed's liking – Wells Fargo

The annual inflation rate in the US rose to 8.6%, the highest level since December 1981 in May according to data released on Friday. The CPI rose 1% m/m, surpassing expectations. Until inflation is demonstrably on the downswing, analysts at Wells Fargo, expect the FOMC to fight back aggressively with tighter policy. They see likely 50 bps hikes next week, and again in July and September. 

Key Quotes: 

“Inflationary pressures were seen nearly everywhere. Energy prices surged, led by a 4.1% increase in gasoline prices, while grocery prices increased 1.4% and pushed the year-ago rate to a pace not seen since the 1970s.”

“Simply put, inflation remains far too high for the Federal Reserve's liking. It is true that there are still one-off factors putting upward pressure on inflation beyond the central bank's control. 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.”

“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.”