May CPI data shows inflation hit highest level since 2023. This is what it means for advisors

While there were few surprises in the latest Consumer Price Index data, the numbers point to an inflationary environment that lays the foundations for a looming rate hike.

Data from the U.S. Bureau of Labor Statistics released early Wednesday show that May’s CPI, an important measure for inflation, increased 4.2% over the last 12 months, up from 3.8% in April, and hitting its highest level in three years. CNBC reports that the May CPI number hit its highest level since April 2023. However, the May CPI number was in line with expectations from economists surveyed by Dow Jones Newswires and The Wall Street Journal.

On a seasonally adjusted basis, CPI increased 0.5% in May, also meeting expectations.

“Most of this morning’s data came in line with expectations,” said Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, in a note.

However, Zaccarelli, like a number of other experts, believes that a rate hike is looming on the horizon. “More importantly – and the market has started to react to this possibility – the Fed’s next move may need to be a hike, and not a cut as many had expected coming into this year,” he said. “The stock market has been climbing a wall of worry and has been able to rally on stronger earnings and stable interest rates, but a rising rate environment is another thing altogether.”

Higher inflation has come back to the forefront of economic news, driving down consumer sentiment, according to Wei-Yin Hu, VP of financial research and strategy for Edelman Financial Engines. "The Middle East conflict is still unresolved, so Americans have been paying more at the gas pump for months now and energy has been an increasing contributor to the headline CPI," he added, in a note. "Higher inflation, combined with recent good news on the employment front, tilts the playing field more toward the Federal Reserve leaving interest rates high or even increasing them."

Core CPI, or the index for all items less food and energy, rose 0.2% in May, below economists’ expectations for a 0.3% increase. On a year-over-year basis, Core CPI, rose 2.9%, in line with expectations.

The index for energy rose 3.9% in May, after rising 3.8% in April and 10.9% in March.

David Doyle, head of economics at Macquarie Group, expects to see more inflationary pressure and a rate hike that could happen early next year. "While the inflation profile ahead hinges on the trajectory of energy prices, we anticipate underlying pressures to remain in core CPI with both this (and core PCE) likely to remain comfortably above the 2% target for the foreseeable future," he said, in a note. "We continue to see the next FOMC move as a likely 25 bps hike in 1Q27, with risks skewed towards an earlier hike timing."

However, Josh Jamner, senior investment strategy analyst at ClearBridge Investments says that the U.S. economy is coping with inflation and the recent spell of market volatility. “With core measures suggesting more limited price increases and much of the upside coming from oil directly (energy) or indirectly (airfares), today’s release suggests that inflationary pressures stemming from the oil price shock have remained manageable for the U.S. economy so far,” he said, in a note.

The S&P 500 index ended Wednesday's session down more than 1.6%.