Inflation has warmed this spring and is expected to hit historic levels in May.

The consensus forecast for the core consumer price index, which excludes food and energy, is 3.5% yoy, according to the Dow Jones. That is the fastest annual pace in 28 years.

Economists expect both core and headline CPIs to have risen 0.5% in May. Headline CPI is expected to rise 4.7% yoy, the highest rate since sky-high energy prices in the fall of 2008 drove inflation numbers higher.

“It’s getting hot. It could be up to 5%,” said Diane Swonk, chief economist at Grant Thornton. “The worst heat in terms of headline headlines is going to be the second quarter. It will be interesting to see what it looks like hiding the extremes. I think we’re still going to have a warm summer if you’ve got price increases for everything from airfare to hotels. “

A customer wearing a protective mask loads wood onto a cart at a Home Depot store in Pleasanton, California on Monday, February 22, 2021.

David Paul Morris | Bloomberg | Getty Images

May CPI is expected at 8:30 a.m. ET Thursday, as investors debate whether the rising price period is temporary, as the Fed believes, or more ubiquitous and persistent. If the latter is the case, there is concern that the central bank will be forced to abandon its loose policies that have helped keep interest rates low, increase liquidity and boost stock market profits.

Higher expectations

Mark Zandi, chief economist at Moody’s Analytics, said he expected core CPI to rise 0.6% from May. “The year-over-year growth rate would be 3.65%,” he said. “The last time it was this high was in July 1992.”

The last time core CPI was above consensus expectation of 3.5% was in February 1993.

Swonk expects headline inflation to be 4.9% yoy. That compares with a headline pace of 4.2% in April. Core inflation stood at 3% year-on-year in April, a level that it has only reached sporadically in the past two decades.

“I’m worried about the rent and the counter-rent from the owners because it was supposed to be increasing. It had slowed down,” she said. Shelter accounts for more than 30% of the CPI, and rental costs have hit rock bottom in some cities, Swonk added. “The problem is it could have longer legs and general inflationary measures are getting more of a boost than people expect.”

Zoom In Icon Arrows pointing outwards

The Fed has announced that it will initiate the first phase of easing if it thinks the economy and labor market are strong enough. Central bank officials said they would tolerate inflation in an average range around their 2% target.

Some strategists expect the Fed to speak about reducing its monthly $ 120 billion at the Jackson Hole Economic Symposium in late August. It is then expected to wait several months and begin reducing purchases in December or early next year.

That would then cause the Fed to slowly reduce its bond purchases for a long time before actually raising interest rates. Most market professionals do not expect the Fed to hike rates before 2023.

Beyond the expected price increases

Zoom In Icon Arrows pointing outwards

Wells Fargo’s bond strategists say they will examine the data for trends beyond the obvious price hikes associated with the economic reopening.

“Airfares, hotels and event entrance fees all saw large price increases and contributed to the rise in CPI inflation in April,” they wrote in a report. “But these categories are only recovering from last year’s declines, and the Fed is unlikely to be affected if prices continue to rise. Inflation in rents, owner-occupiers and medical care (together 50% of the core CPI basket) is subdued. “

CNBC Pro Stock Pick and Investment Trends:

Grant Thornton’s Swonk said the surge in inflation was being driven by a backlog and consumers were rushing to return to normal.

“The biggest thing I’ve been worrying about for a long time is whether or not we see a friction response when we re-enter, before you get to the cold water and the surface of the water, it gets hot,” she said.

Economists are closely watching wages that have risen. They assume that the picture will only become clear in several months, as workers are likely to return to work. The 559,000 new jobs added in May were lower than expected, but the pace of hiring is expected to pick up in September when federal unemployment benefits expire and schools reopen so parents can go back to work.

Inflation: Good to a certain extent

A certain amount of inflation is good for the stock market, especially for those companies that can face rising costs with higher commodity prices. Inflation turns negative when it gets too hot and margins erode.

“These short-term readings will not tell us whether the inflation data will be anything but temporary,” said Ron Temple, head of US equities and co-head of multi-asset investing at Lazard Asset Management. He said it would be a few more months before it was clear whether the period of higher prices was temporary.

Temple said a hot CPI – one that is much higher than expected – would be negative for stocks and bonds. Bond yields rise when prices fall.

“I think inflation is what people want to be afraid of … I think it’s a misguided fear. I think the worst we can have is deflation, ”he said.

Temple said he doesn’t expect a few months of rising inflation to destabilize the stock market, but he said there are bond market professionals who believe the Fed may end its bond program sooner.

“I think the Fed will keep its cool. You made it clear. The comments are consistent. I think,” [Fed Chairman] Jay Powell did a good job discussing ‘impermanence’, “he said.

Market-based inflation expectations have been falling lately, with 10-year government bond yields falling below the all-important 1.5% on Wednesday.

George Goncalves, head of US macro strategy at MUFG, said investors were looking for an explanation for the surprising decline in yields, but he said it could simply be that the market is not paying attention to the pace of inflation or economic growth the current state remains levels.

“It has to be short. I think what we’re experiencing is also a rethinking of the narrative,” he said. “We are experiencing the peak of activity, the peak of inflation, and markets should be forward-looking.”