NEW YORK Soaring gasoline and energy prices helped drive up U.S. consumer prices during May by the fastest rate since November, a government report on Friday showed.
KEY POINTS: * The 0.6 percent rise in May prices was more than the 0.5 percent gain Wall Street analysts polled by Reuters were expecting after a 0.2 percent increase in April. * So-called core prices, which exclude volatile food and energy, were up 0.2 percent as expected, the Labor Department report showed. * Energy prices surged 4.4 percent during the month, the biggest rise since November, after holding steady in April. That was driven by a 5.7 percent spike in gasoline prices during the month, also the biggest rise since November. * In further evidence of inflationary pressures, year-over-year consumer prices rose a larger-than-expected 4.2 percent, the biggest rise since January. But core prices advanced 2.3 percent as expected. Analysts were expecting a 3.9 percent gain in overall prices.
CHRIS RUPKEY, SENIOR FINANCIAL ECONOMIST AT BANK OF TOKYO-MITSUBISHI UFJ IN NEW YORK:
"There is a bit of a relief rally in Treasuries. It looks as though the secondary effects of the oil price shock are not affecting the core. It seems less urgent for the Fed to move rates higher."
"Yields have gone to pretty attractive levels and the Fed is on the case if there is any inflation: they are talking tough. The market has discounted three rate hikes by the October meeting. I think that's enough for now."
CARL LANTZ, U.S. INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW YORK:
"The market was pretty afraid of this number so we sold off going in. There is some relief that it was not terrible.
"The core was 0.2...There was some noise from hotels. Hotels jumped 1.3 percent on the month but the trend in hotel prices has clearly been down. Given the high gas prices, weak consumer you don't expect hotel rates to be sustainably higher. If you take out hotels you almost get down to a 0.1 percent core, it would be like a 0.15 percent.
"The core was actually very tame. The headline we sort of knew about. It did go up a little higher than the consensus but that was all gasoline and obviously that's well priced into the market.
"There was a lot of fear going into the number and now we're getting this relief rally after so much selling. The only thing that will hold us back a little bit probably is this inflation expectations number coming out of the Michigan survey."
ROBERT MACINTOSH, CHIEF ECONOMIST, EATON VANCE CORP, BOSTON:
"On the face of it it's an ugly number. But you're only supposed to care about the core here in the U.S., so the point 2 is right on expectations. Until the market really gets the joke and realizes food and energy really do count, this shouldn't cause much of a blip.
"I do think, though, the more we hear from different bankers and policy-makers, I think the market is coming around to realizing that you do need at some point to think about food and energy. That ultimately is going to work it's way into final goods prices.
"In a way, I'm sanctioning what we're hearing out of Europe, where they do seem to pay more attention to overall inflation, not just core inflation... We've just been avoiding the food and energy side of things here in the U.S. for too long."
BRIAN BETHUNE, U.S. ECONOMIST, GLOBAL INSIGHT, WALTHAM, MASSACHUSETTS:
"In terms in the inflation picture right now, core inflation looks well under control. We have two to three months of it running at 0.2 percent or lower.
"Of course, we are getting the pressure on the top level inflation at 0.6 percent. It's not going to go away anytime soon. We think it's going to get worse."
"The good news is that core inflation hanging in at these levels. What we looking at is a situation which we are dealing with the headline inflation staying ugly and the core inflation staying under control."
"It's not going to change the Fed's rhetoric. They are going to keep talking about all aspects of inflation."
"The preferred path is for the Fed to keep rates steady. If this (inflation) doesn't behave, the Fed won't have any choice but to raise rates. That's going to be painful in 2009; they might have to bring them down again."
"It seems to me though there is a lot myopic short-term (pricing) decisions going on with private industries."
KEN LANDON, GLOBAL CURRENCY STRATEGIST, JP MORGAN CHASE,
"The headline number supports the recent expectations that the Federal Reserve is going to hike rates. Markets went into this report fairly long dollar and so there wasn't such a big move in the currency. Big picture, this supports a strong dollar. But short term, the markets were really long and some wanted to take some profits."
OWEN FITZPATRICK, HEAD OF U.S. EQUITY GROUP, DEUTSCHE BANK PRIVATE WEALTH MANAGEMENT:
"The way the (stock) market is reacting to it (CPI data) is muted, (it's) not a positive, but this is not going to major damage to the stock futures.
"The bigger issue for the market (today) will be energy prices and oil."
LINDSEY PIEGZA, MARKET ANALYST, FTN FINANCIAL, NEW YORK:
"It's not as bad as it looks. It's pretty concentrated in the energy sector. Consumers are forced to eat the price. There is nothing they can do. We know oil is flying through the roof. We knew it was coming."
"What is scary is the year-over-year number. You never wants to see a 4 (percent) handle."
"Consumers are spending more to buy food and energy. The tax rebate is just offering them a cushion. They are not buying widescreen televisions."
MARKET REACTION: * BONDS: U.S. Treasury debt prices retrace losses, turn flat * CURRENCIES: U.S. dollar holds broad gains * STOCKS: U.S. equity index futures build on gains * RATES: Fed funds rate futures trim losses