A Moment Of Truth From JPM: "It's Hard To See The Recent Growth-Inflation Mix As Anything Other Than Discouraging"

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Highlights in the latest comment from JPM's Michael Feroli ours:

Both the headline and core Consumer Price Index (CPI) came in firmer than expected in May. The CPI increased 0.35% (2.1% over year-ago), and the ex-food and energy core CPI rose 0.26% (2.0% over year-ago), the largest one-month increase for this measure since October 2009. Over the past three months the core CPI is now up 2.8% annualized. By our estimate this implies a 0.16% increase for May in the Fed's preferred core PCE measure of inflation, which would take the year-ago increase up to 1.5%.


The recent move higher in inflation makes the Fed outlook more interesting. As for tomorrow, the current statement language on inflation is so generic that it doesn't have to be modified, though the recent news could increase the odds that an amendment could me made to mention inflation moving back towards the Committee's longer-run objective.


The dots are submitted at the beginning of the two-day meeting, which starts at 10am today, so today's print shouldn't have a material impact on the dot plot (recall that the midpoint of the core PCE projection for 4Q14 at the March meeting was 1.5% -- which should be achieved in May -- we have already been expecting a modest move higher in tomorrow's projection). At the margin, today's inflation print further tilts the odds toward an earlier first rate hike relative to our current 4Q15 call....The higher-than-anticipated headline PCE inflation implication (our reading is +0.22%), implies lower real consumption spending growth in May, we think only up 0.1% now. Through the first five months of the year the headline CPI is up at a 2.6% annual rate, even though first half GDP growth may come in around 0.5% annualized....


While some may cheer an earlier Fed rate hike, its hard to see the recent growth-inflation mix as anything other than discouraging.

Fear not: we are confident many will try because, clearly, it's the blamy(sic) spring's fault.