The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4% in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. That creates an inflation rate of 2.1% over the last 12 months, the biggest increase since October 2012.
The 0.4% increase in May was double the expected number and resulted from broad-based price increases. The food-at-home index rose 0.7%, its largest increase since August 2011. Overall energy prices were up a strong 0.9%, with the price of gasoline rising 0.7%. Medical care commodities were up 0.5%.
Core inflation – which strips out food and energy – rose 0.3% in May, its largest increase since August 2011. It is up 2.0% in the last 12 months.
Holders of TIPS and I Bonds are also interested in the non-seasonally adjusted CPI-U, because that number is used to set the inflation adjustments to principal on TIPS and the future interest rates of I Bonds. In May, non-seasonally adjusted inflation rose 0.33%. For 12 months it was up 2.1%.
This chart shows the trend toward higher inflation over the last several months:
I have updated my Tracking Inflation and I Bonds page to reflect these new numbers.
Inflation heating up? Here is an interesting analysis posted today by Michael Ashton in his E-piphany blog:
This was potentially a watershed CPI report. … (T)he biggest red flag in all of this is not the size of the increase, and not even the fact that the monthly acceleration has increased for three months in a row while economists keep looking for mean-reversion (which we are getting, but they just have the wrong mean). The biggest red flag is the diffusion of inflation accelerations across big swaths of products and services.
In my mind, this is the worst inflation report in years, largely because there aren’t just one or two things to pin it on. Many prices are going up.
Treasury Inflation-Protected Securities 
Len, sure it is possible that a more-recent, low-yield, taxable TIPS will be cash-flow negative if inflation rises sharply. I can live with that for 5 to 10 years because I will get the money at maturity, taxes paid. But it makes a 30-year TIPS undesirable, in my opinion.
I will be shocked if the Fed raises short term rates before sometime in 2015, probably mid 2015. But if inflation does actually accelerate, it could be earlier.
Lest we grow complacent, this is actually bad news for holders of TIPS and I bonds with low coupons, as well as other bond holders. If the coupon is only .1%, .2% or .125% our after tax, after inflation return is really negative. And worsens as inflation becomes higher even if one might be in the 15% marginal tax bracket. Anyone care to speculate on the Fed’s next move?