May Consumer Price Index

Wall Street advanced for a second session Friday as the Labor Dept. released its widely anticipated reading on the nation’s inflation rate for the month of May.

The Consumer Price Index (CPI), as a measure of the average change in prices over time of goods and services purchased by households, increased on a seasonally adjusted basis – by 0.6% last month versus expectations of a 0.5% gain.

This was the biggest one month jump since last November as surging food and fuel prices continue to rise. However, stripping out the always volatile food and fuel component, the core rate edged up moderately at 0.2 percent in May, meeting analyst expectations.

This fact appears to have eased some investor concerns about the effect of rising prices on consumer spending, as it clearly shows gains in food and energy has not led to more widespread inflation at the consumer level.

Meanwhile, the CPI for all urban consumers is up 4.2% versus a year ago. The index for energy, which was virtually unchanged in April, increased 4.4 percent in May. The index is up 17.4% versus last year after having advanced at a 16.5 percent seasonally adjusted annual rate in the first five months of 2008. Excluding energy, the May CPI increased 0.2% and is up 2.7% year-over-year.

Food and beverages prices on the other hand, rose 0.3 percent in May following a 1.5 percent rise in April and are up 5.0% versus a year ago.

The CPI figures as stated in this latest report, are unlikely to alter inflationary expectations. We think that inflation as opposed to slow growth remains the key issue for the economy to be addressed going forward. Let’s not forget, the CPI is up 4.2% versus a year ago and in the past four years, relatively speaking – almost all the volatility in energy/food prices has been to the upside. Once energy and food prices stop rising as quickly, core inflation if not kept in check, will accelerate to subsequently pose serious risks to our overall economic growth.

On a separate news while remaining in the economic front: the preliminary consumer confidence survey for June from the University of Michigan has fallen to 56.7 from 59.8 last month, which is below the 59.0 economists were expecting. The reading has not ticked up since January marking the fifth straight month-over-month decline.

Taken together, these reports seem to make the case for the Fed to keep rates unchanged, rather than raising them, when it meets June 24. However, under a scenario in which the Fed takes back a one-quarter rate cut: this will be a positive development as it will eventually lead to the strengthening of the greenback and will attract new liquidity and capital flows into the US economy. More importantly, it will be a bullish approach further increasing Fed’s attempts of containing inflation.

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