A person shops at a Trader Joe's grocery store in the Manhattan borough of New York City, New York, U.S., March 10, 2022.
A person shops at a Trader Joe's grocery store in the Manhattan borough of New York City, New York, U.S., March 10, 2022. Reuters / CARLO ALLEGRI

Fresh data showing underlying U.S. inflation remained stubbornly hot in May are building a case for a longer string of sharp Federal Reserve interest rate hikes than previously expected, with policymakers primed next week to signal they will have to be more aggressive.

Rising food and record fuel prices pushed the consumer price index (CPI) up 8.6% last month from a year earlier, a U.S. Labor Department report showed Friday, shattering any hopes that inflation had peaked the prior month.

Core CPI - which strips out volatile gas and food prices - rose 6%, down slightly from April's 6.2% pace but far from the "clear and convincing" sign of cooling price pressures that Fed Chair Jerome Powell has said he needs to see before slowing rate hikes.

"So much for the idea that inflation has peaked," wrote Bankrate chief financial analyst Greg McBride. "Any hopes that the Fed can ease up on the pace of rate hikes after the June and July meetings now seems to be a longshot."

Fed policymakers have already all but promised half-point interest rate hikes at their next two meetings - the first next week, and the second in late July.

Some had thought that by September their own rate hikes, along with easing supply chain pressures and an expected shift in household spending away from supply-constrained goods and toward services, would have started to ease price pressures.

Friday's inflation read report suggested the opposite.

Used car prices, which had been sinking, reversed course and rose 1.8% from the prior month; airline fares rose by 12.6% from the prior month, and 37.8% from a year earlier. Prices for shelter - where trends tend to be particularly persistent - rose 5.5%, the biggest jump since February 1991.

Those figures suggest U.S. central bankers may stay locked into half-point increases through their September meeting and even beyond as they try to wrangle inflation lower by slowing the economy.

Traders of futures tied to the Fed's policy rate are now betting on half-point rate hikes at least through September, with some chance of an even bigger rate hike before then. Contracts reflect expectations for the policy rate to end the year in the 3%-3.25% range.

The Fed's current policy rate target is now 0.75%-1%. Fed officials want to get it higher without undermining a historically tight labor market and sending the economy into recession.

May's inflation report appears to make that task even harder.

"These are ugly numbers...I'd say we'll probably be in a recession in the fourth quarter of this year with confirmation in the second quarter of 2023," said Peter Cardillo, chief market economist at Spartan Capital Securities.