What Wall Street is saying about May's shocking inflation report

Inflation continued to surge in May, increasing at the quickest pace in 40 years as consumers face rising challenges at the gas station and grocery store.

The Consumer Price Index (CPI) published Friday by the Bureau of Labor Statistics rose 8.6% from a year ago, up from April's reading of 8.3% and higher than economists had projected.

Federal Reserve policymakers tasked with bringing prices back down to earth are likely to take cues from May’s CPI report on how aggressively they need to raise interest rates to mitigate inflation that shows no signs of abating.

Wall Street reactions came in fast and furious after the data, and Yahoo Finance rounded up some of what we got in our inbox below:

Brian Coulton, Chief Economist, Fitch Ratings

Coulton, chief economist at Fitch Ratings, says the May figures are the "clearest sign we have of inflation broadening and starting to becoming embedded."

"While the pick-up in the headline CPI inflation rate to 8.6% y/y from 8.3% y/y in April was all explained by food and energy, the striking aspect was the continued strength in core inflation on a month-on-month basis (at 0.6%). Core goods inflation picked up sharply on a month-on-month basis as car prices started to rise again – this may speak to a re-intensification of global supply-chain pressures. And services inflation just keeps heading north driven by rents (shelter costs) - this is probably the clearest sign we have of inflation broadening and starting to becoming embedded and something the Fed cannot ignore."

Aditya Bhave, US and Global Economist, and Meghan Swiber, Rates Strategist, Bank of America

Bhave, an economist at Bank of America, and Swiber, a rates strategist pointed out that all major components of the report increased last month:

“Stepping back, we are struck by the fact that there were almost no pockets of weakness in this report. The data are consistent with our view that inflation is no longer just a function of goods supply-chain disruptions. Inflation is also being driven by strong consumer demand because of a red hot labor market and strong wage inflation. Accordingly, inflation has become embedded in the more cyclical service sectors as well.”

Charlie Ripley, Senior Investment Strategist, Allianz Investment Management

Ripley, senior investment strategist at Allianz points out that Federal Reserve officials are likely to ramp up interest rates more aggressively than anticipated after Friday's print.

“While many market participants were looking for inflation pressures to begin to cool, the latest CPI continues to show the opposite. Many Americans are feeling the pain with headline CPI rising to a four-decade high of 8.6%. From a Fed perspective, the chase continues, and more aggressive Fed measures will likely be needed to catch up to runaway inflation. Whether this translates to more aggressive hikes this summer, or a continuation of 50 basis point hikes this fall is the option for the Fed, but the overall reality for the Fed is that inflation is not under control, and they have their work cut out for them in the coming months.”

Ben Ayers, Senior Economist, Nationwide

“There was nowhere to hide from higher prices in May. With consumer inflation at another 40+ year high, it is clear that inflationary pressure is not fading and may be gathering steam in response to repeated global supply shocks. The initial interest rate hikes by the Fed this spring have done little to slow down the inflation train so far, but further sharp tightening should be coming soon.”

Greg Daco, Chief Economist, EY-Parthenon

Daco, chief economist at EY-Parthenon, indicated that as inflationary pressures persist and the labor market shows signs of slowing, stagflation — an economic condition in which the growth rate slows and inflation remains high — could be on the table for next year.

"Should we fear stagflation? No, not in 2022, but the risks will be much greater in 2023. In the face of lingering inflation, rising interest rates and slower global activity, US businesses will likely curb hiring and small businesses will be on the forefront of this slowdown. Encouragingly though, the US economy and the labor market are entering this economic slowdown from a robust position, and companies are looking to build resilience in the face of global economic and geopolitical uncertainty. This will likely mean retaining strong talent, instead of proceeding with severe layoffs."

Nancy Davis, founder of Quadratic Capital Management

Davis, founder of Quadratic Capital Management, offered an even sterner warning on stagflation:

"Stagflation risk is real and we may already be there. Inflation is running hot and the last GDP print was negative. To some, our economy may feel very much like we have stagflation, with higher prices and slowing consumer confidence. One can easily draw a scenario where supply shocks continue to push inflation higher despite a hawkish Federal Reserve tightening monetary policy."

Jeffrey Roach, Chief Economist, LPL Financial

"The fact that the dollar is gaining on the news means that investors are looking for safe havens and market volatility will likely continue."

"The CPI does not go into the Fed matrix for policy. The core PCE deflator, which accounts for substitution effects, is the important metric. However, the odds of a 50 basis point hike in July are looking more likely. Of course, the Fed is expected to hike by 50 basis points next week."

Ian Shepherdson, Chief Economist, Pantheon Macro

"This report kills any last vestiges of hope that the Fed could pivot to [a 25 basis point hike] in July, but we remain hopeful for September, on the grounds that the next two core CPI prints will be lower than May’s; the three jobs reports will show that wage gains continue to moderate; and because by the time of the September meeting, the housing meltdown will have everyone’s attention, and continuing to hike by 50bp will look gratuitous."

Seema Shah, Chief Strategist, Principal Global Investors

"What an ugly CPI print. Not only was it higher than expected on almost all fronts, pressures were clearly evident in the stickier parts of the market. The decline in inflation - whenever that finally happens - will be painfully slow. The Fed's price stability resolve is going to be really tested now. Policy rate hikes will need to relentlessly aggressive until inflation finally starts to fade, even if the economy is struggling. Any chance of a Fed put, already very low, has been "put" firmly to bed."

Bill Adams, Chief Economist, Comerica Bank

"Higher than expected inflation in May is also bad for the growth outlook. The longer inflation stays high, the faster the Fed will raise rates, and the larger the headwind to growth will be. Equity market futures are broadly lower on Friday morning, anticipating larger downside risk to the economic outlook from falling inflation-adjusted incomes and faster interest rate hikes."

Ron Temple, Head of U.S. Equities, Lazard Asset Management

"If the Fed had any doubt about the need for additional substantial rate hikes, they should be dispelled by this report. Accelerating shelter inflation in particular should raise a bright red flag. Housing is the single largest expense for consumers, and it’s the stickiest, often entailing a 1-2 year lease. As home purchase prices have rocketed, renters have little choice other than to accept steep rent increases. Consumers know these cost increases will not reverse, fueling demands for higher wages to make ends meet. With labor markets the tightest in decades, employers have little choice other than to raise compensation, which in turn contributes to increasing services inflation. The Fed faces a mighty challenge breaking this potential wage-price spiral."

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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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