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“Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars’ worth of groceries. Today, a five-year-old can do it.” – Henny Youngman

Equities are looking to close out the week on a positive note today as futures have been steadily drifting higher all morning.  The economic calendar is light today with Michigan Confidence the only report on the calendar. One aspect of that report that investors will be watching is inflation expectations.  Any material increase in those readings could pose a threat to the positive early tone. The latest readings on inflation expectations in this report were 4.6% for the next year and 3.0% over the next 5-10 years.

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The market certainly took yesterday’s high CPI reading in stride. On the one hand, looking back at the last 35+ years, there have been a number of other periods where headline CPI temporarily eclipsed 0.5%.  Unique about the current period, however, is that May’s report was the third straight month that prices increased 0.5%+ on a month over month basis. We don’t see that happen too often.

Since 1985, there have been just three other periods where headline CPI jumped 0.5% three months in a row, and in none of those prior periods did the streak extend to a fourth month.  In the chart below, we show the 10-year US Treasury yield going back to 1985 and have marked each of the three-month streaks where CPI topped 0.5% in red.  In two of the three periods (1990 and 2008), that surge in inflation marked the peak of the 10-year yield for at least the next year.  In the third (2005), yields kept rising over the following year increasing from a level of about 4.3% up to 5.3% nine months later.