4.2%.
That is the headline CPI the Bureau of Labor Statistics printed this morning for May, up from 3.8% in April. The highest annual reading since April 2023. Month over month, prices rose 0.5%.
The number underneath the headline tells a quieter story.
Core CPI, which strips out food and energy, rose just 0.2% month over month. The Street expected 0.3%. The annual core rate edged to 2.9% from 2.8%, but the monthly deceleration from April's 0.4% is the part worth reading carefully.
Gasoline prices surged 40.5% year over year and energy overall jumped 23.5%. Food accelerated to 3.1% from 2.3%. Shelter ticked higher to 3.4%.
The trajectory makes the case. In January, headline CPI was 2.4%. Five months later it is 4.2%.
That kind of acceleration, nearly doubling in under half a year, has not happened since 2021. But core has barely moved from the 2.8% range it held at the start of the year.
Inflation is not broadening. It is funneling through one channel, and that channel runs through the Persian Gulf.
Strip energy and the picture looks manageable. Leave it in and the Fed faces a consumer problem, a messaging problem, and a credibility problem heading into next week.
The 10-year yield is sitting around 4.57%. Markets are pricing 99% odds the Fed holds at 3.50% to 3.75% on June 17.
But the decision is priced. The dot plot is not.
Fed funds futures now imply roughly 63% odds of a quarter-point hike by December. A 4.2% headline paired with 172,000 jobs last month gives hawks the data to push for tighter language, or to start building the case for a September move.
For rate-sensitive sectors, the headline is what counts. Mortgage rates above 6.5% are not easing with a 4-handle on CPI. The chip selloff we covered yesterday finds no relief from a print that keeps the discount rate elevated.
The S&P 500 closed at 7,386 yesterday, down 0.26%. The Nasdaq fell nearly 1% to 25,679 as chips continue pulling back. Futures are pointing lower again this morning.
But for portfolio positioning, the core/headline split is the signal worth following. If the inflation problem is gasoline and gasoline alone, it resolves when either the Strait reopens or oil corrects. That is a geopolitical event, not a structural inflation regime.
Sectors exposed to the underlying economy rather than the energy shock sit on the better side of the divide: financials collecting wider net interest margins, staples with pricing power that tracks food costs, healthcare insurers whose premiums reset annually.
ExxonMobil collects directly. WTI around $88, Brent around $91, and gasoline running 40% above last year translate straight into upstream margins.
Exxon trades at roughly 12 times forward earnings with a 2.7% dividend yield. The forward multiple is half the trailing, a sign the Street expects elevated energy revenues to persist. When the inflation headline is an energy headline, the majors earn.
A week ago we noted four dissents at the most recent FOMC, the deepest split since 1992. Three hawks pushed for tougher inflation language. One dove wanted a cut.
Today's print hands the hawks their strongest data point yet, while the cooler core gives doves just enough cover to argue the underlying trend is contained. Warsh's first press conference next Wednesday will show which camp he joins.
Oracle reports after the close tonight with $553 billion in remaining performance obligations, up 325% year over year from AI cloud contracts. Wall Street expects $1.96 per share on $19.1 billion in revenue, and options are pricing roughly a 12% move. The question is whether that backlog is converting fast enough to justify the multiple.
Super Micro is down sharply in premarket after announcing $7 billion in equity and convertible offerings to fund AI server component purchases. Dilution at that scale signals demand is real, but existing shareholders absorb the cost.
SpaceX prices after the close tomorrow at $135 per share. First trades expected Friday under SPCX. The largest IPO in U.S. history lands into a market digesting its hottest inflation print in three years.
The headline says 4.2%. The core says 2.9%. Which number the Fed chooses to emphasize next Wednesday determines the next leg.
