May’s hot inflation read means there’s ‘nowhere to hide’—and a risk of even more pain in stocks as the Fed hikes faster, BofA says

Bank of America Research analysts warned consumers in a report titled  “nowhere to hide” that inflation is becoming increasingly—and frighteningly—inescapable in everyday staples including housing, gas, and food. 

The consumer price index for all items jumped 1% from April, worse than Wall Street’s predictions of a 0.7% increase. At the same time, “core” inflation — which excludes the more volatile prices of food and gas — rose 0.6%, more than the 0.5% expected, although it actually fell from April

A major contributor to the rise was surging new and used car prices, by 1% and 1.8% respectively. BofA said this may indicate the auto industry faced a new round of supply shortages last month. A global semiconductor chip shortage still threatens the automobile industry’s recovery two years after the pandemic began. 

Also driving the index were the cost of shelter rising 0.6% and airfares soaring 12.6%. The cost of plane tickets has seen a 48% increase in the last three months alone, according to the note. 

“Inflation is no longer just a function of goods supply-chain disruptions,” the team led by Aditya Bhave wrote. “Inflation is also being driven by strong consumer demand because of a red hot labor market and strong wage inflation.” 

The team then sounded the alarm, saying “inflation has become embedded in the more cyclical service sectors (e.g., housing) as well.” This is a scary sign as inflation gets really dangerous when it becomes what economists call “embedded,” which refers to consistent price increases in most or all parts of the economy. That’s what BofA hinted at, saying “we are struck by the fact that there were almost no pockets of weakness” in the CPI report. 

Accordingly, BofA said it expects this report to push the Federal Reserve toward a “more aggressive” response to fight inflation with more and bigger interest-rate hikes. It said that although the Fed has already telegraphed 50 basis point rate hikes in June and July, “today’s print increases the risk of another 50bp increase” and the market is pricing in an even more aggressive Fed response on the back of this inflation read.

Friday’s report is “consistent with a Fed needing to hike aggressively to cool inflation at the expense of longer term growth,” the note said. Given stocks’ reaction to the Fed hikes so far this year, that likely means more pain ahead for investors.

The Biden administration has pointed to the Fed as the party responsible for controlling inflation, saying the central bank holds the primary responsibility.

“What the numbers today underscore is what the president has been saying and what we are focused on—which is fighting inflation—has got to be our top economic priority,” Brian Deese, the director of the National Economic Council said on Bloomberg TV Friday. “The Fed has the tools that it needs, and we are giving them the space that it needs to operate.”