Recent inflation data for the US showed another strong month of price rises, which poses questions for the Fed.
Prices were up 0.6% for May, leaving the annual figure at 5% which is buoyed by low prices at the height of the pandemic. Even core inflation was very strong, up 0.7%.
The Fed has been firm in its stance that these surges in inflation will prove transitory, so there is no need to tighten policy. Accordingly, 10-year treasury yields declined following the release and equity markets showed no hiccup.
Commodity prices, which make up 20% if the index were up 1.8% for the month. This is thought to be transitory as supply will eventually respond.
Services on the other hand are believed to be more sustainable. They comprise 59% of the index and rose 0.4% for the month.
As discussed in Curve’s monthly insights, if strong inflation continues, the Fed will be challenged on their view of transitory inflation. Also, if inflation continues before unemployment has recovered then the Fed will have to decide whether to rein in inflation or leave policy loose to support employment.
The ECB overnight upgraded their inflation and growth forecasts following better-than-expected economic data. But like the Fed, maintained their current QE programme as they believe there remains too much slack in the economy and inflation will prove transitory.