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The headline Consumer Price Index increased by 0.2 percent in May, less than we expected, as energy price gains were offset by moderating prices elsewhere.

May 2018 Consumer Price Index, NFIB

June 12, 2018
By Robert A. Dye, Ph.D., Daniel Sanabria

Stable Non-Energy Prices Offset the Push from Energy

• The Consumer Price Index for May increased by 0.2 percent.
• The Core CPI also gained 0.2 percent for the month.
• The National Federation of Independent Business’ Small Business Optimism Index increased in May.

The headline Consumer Price Index increased by 0.2 percent in May, less than we expected, as energy price gains were offset by moderating prices elsewhere. Over the previous 12 months, headline CPI is up by 2.8 percent. The CPI’s energy sub-index was up by 0.9 percent for the month, reflecting higher gasoline prices in May. The national average price for unleaded regular gasoline was $2.87 per gallon in May according to AAA. That was up 53 cents from a year earlier. Crude oil prices were on an increasing trend for most of this year, with the daily average price for WTI peaking near $72 per barrel on May 22. In late May we saw crude oil prices ease back to about $65 per barrel by the end of the month. Gasoline prices have dropped a few pennies into mid-June, now down to $2.92 per gallon. Food prices were unchanged in May. The core CPI, excluding food and energy, also increased by 0.2 percent for the month, and is up by 2.2 percent over the previous year. While easing crude oil and other energy prices may take some pressure off the CPI in June, import prices may start to add some pressure. The Trump Administration has increased tariffs on imported steel and aluminum from key international suppliers. That will work its way through the supply chain. The import price index for April was up 3.3 percent from a year earlier.

According to the National Federation of Independent Business, small business optimism increased in May to the second highest level in the past 45 years. The NFIB Index gained three points in May, to hit 107.8. The NFIB credits tax cuts and regulatory relief as key factors supporting increased small business optimism. The results show that businesses are paying more for labor. The compensation sub-index hit a 45-year high in May. The net percent of businesses planning price increases climbed to 19 percent, the highest level since 2008. Job openings and hiring remain strong.

Given recent positive economic data and warm inflation metrics, the likelihood of a fed funds rate increase tomorrow, at the conclusion of the Federal Open Market Committee meeting, is about as high as it can possibly get. We expect to see another 25 basis point fed funds rate hike on September 26. In addition to the rate hike, tomorrow we will get a lot of information from the Fed, including a new set of economic projections, a new dot plot and a Jay Powell press conference. We expect that information will move the dial on the probability of a fourth fed funds rate hike this year, possibly coming on December 19.

Market Reaction: U.S. equity markets were volatile at the opening bell. The 10-Year Treasury bond yield is up to 2.96 percent. NYMEX crude oil is up to $66.63/barrel. Natural gas futures are down to $2.92/mmbtu.

For a PDF version of this report, click here: May2018ConsumerPriceIndexNFIB

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