Consumer Inflation Moves Higher In May

Consumer inflation was on the rise in May, while small business owners also expressed labor and inflation fears. Plus, two important auctions were in the news.

Red Hot Consumer Inflation

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.6% in May. The year over year reading increased from 4.2% to 5%, which was the highest year over year increase in almost 13 years!

Core CPI, which strips out food and energy prices, was up 0.7% in May. On a year over year basis, Core CPI increased from 3.0% to 3.8%, which is the highest year over year increase in 29 years!

Within the report, we saw that rents rose 0.1% in May, increasing by 2% on a year over year basis. A rise in rent prices will likely lag but could contribute more to service inflation in the coming months.

Remember that part of the reason for the increase in the annual comparisons is that readings for the more current months are replacing the readings from 2020 when much of the economy was shut down due to the pandemic. For example, the -0.1% reading of Core CPI from May 2020 has now been replaced with a 0.7% reading from May of this year.

Even though this rise in inflation in May was expected, the big question is whether or not some of the factors influencing inflation are going to be transitory. Inflation erodes a Bond's fixed rate of return. In other words, rising inflation can cause Bonds to worsen or lose value. This includes Mortgage Bonds, to which home loan rates are inversely tied. When Mortgage Bonds move lower, be it due to rising inflation or other reasons, home loan rates move higher.

Though many factors influence the markets, keeping an eye on inflation is always important.

Businesses Express Labor and Inflation Fears

Inflation was also on the minds of small business owners last month, per the National Federation of Independent Business Small Business Optimism Index. Businesses expecting higher selling prices rose 4 points to 40%, which is the highest level in 40 years!

Labor was also a big concern, as a record-high 48% of small business owners reported unfilled job openings in May, up from 44% in April. In addition, the quality of labor ranked as businesses' "single most important problem," with 57% of respondents saying they had few or no qualified applicants for open jobs, up from 54% in April.

If production costs are rising and businesses can’t find workers to fill positions, they have to pay workers more and raise prices. These reports only point to higher inflation to come.

On a related noted, the Labor Department's JOLTS report, which tracks the monthly change in job openings, was reported at a record 9.3 million in April, which is an increase of 1 million from March. Only 7% of new job postings were filled.

Initial Jobless Claims Remain Under 400,000

The number of people filing for unemployment benefits for the first time decreased by 9,000 in the latest week, as Initial Jobless Claims totaled 376,000. Though this wasn't much of an improvement from the previous week, it was a move in the right direction. California (+53K), Illinois (+31K) and Georgia (+21K) reported the largest number of claims.

The number of people continuing to receive regular benefits decreased by 258,000, with Continuing Claims coming in at 3.5 million. We likely won’t see meaningful changes in this data until after September, when the extended benefits expire. Even still, many people who have children and rely on schools or childcare opening may still face challenges.

Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire) decreased by roughly 83,000 combined.

All in all, 15.35 million people are still receiving benefits throughout all programs, which is down 95,000 from the previous week.

Update on Auctions

Investors were closely watching the 10-year Treasury and 30-year Bond Auctions that were held last week on Wednesday and Thursday, respectively, to see if there would be more demand for Treasuries and Bonds at auction.

Demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower. Weak demand can signal that investors think yields will continue to move higher, which can have a negative effect on rates.

The 10-Year Treasury Note Auction was met with above average demand, which helped Mortgage Bonds move higher afterwards. The bid to cover of 2.58 was above the one-year average of 2.40. Direct and indirect bidders took 84.2% of the auction compared to 76.2% in the previous 12.

Thursday's 30-year Bond Auction was met with average demand. The bid to cover of 2.29 was just below the one-year average of 2.33. Direct and indirect bidders took 82% of the auction compared to 79.5% in the previous 12.