As far as I can tell right now, inflation is transitory, and the will still be cutting later this year. The Labor Department announced on Wednesday that the Consumer Price Index (CPI) rose 0.5% in May and 4.2% in the past 12 months. The core rate, excluding food and energy, rose 0.2% and 2.9% in the past 12 months. Energy prices rose 3.9% in May and accounted for the bulk of the inflation increase.
Owners’ equivalent rent (shelter costs) rose 0.3% in May, which was a big deceleration from 0.6% in April. Economists were expecting the core rate to rose 0.3% in May, so core inflation came in lower than expected. Treasury yields declined after the CPI report, which is positive. The Producer Price Index (PPI) announcement on Thursday will also be pivotal.
Bank of America’s strategist Savita Subramanian, in a note to clients, pointed out that the gap in the tech sector between the best and worst performing quintiles’ median stock is a “whopping” 120 percentage points, the highest since February 2000, the peak of the internet boom. My problem with Subramanian’s conclusion is that she is ignoring the underlying fundamentals and the fact that the ’s earnings rose 29.3% in the first quarter. Furthermore, the S&P 500’s earnings are forecasted to rise 21.5% this year, and I expect that will be revised higher due to accelerating GDP growth as well as positive analyst earnings revisions.
Speaking of , the is currently estimating 3% GDP growth for the second quarter, but I am expecting upward revisions in the wake of positive and service sector surveys, as well as robust retail sales. Costco announced that its same-store sales rose 8% in May, while its online sales surged 20%, so consumers are still spending up a storm, despite higher prices at the pump, which are now moderating. In fact, I was in Houston this week and very encouraged that both gasoline and diesel prices have declined significantly.