CPI inflation in June surged past what were already eye-wateringly high expectations, increasing 1.3% in the month. Even more troubling, the drivers behind the upside miss were broad-based and mostly in the “core” components. Core CPI inflation rose 0.7% in June despite consensus expectations for a downshift to 0.5% from the 0.6% print in May. Price gains for goods such as apparel and vehicles showed no signs of easing, while inflation for services such as shelter and medical care continued to grind higher. In our view, it will take at least several consecutive monthly inflation readings of slowing price growth for the Federal Reserve to start to believe that it has the current inflation episode in check. Today’s CPI release offers monetary policymakers zero reassurance that they are on that path at present. A 75 bps rate hike at the upcoming FOMC meeting on July 27 appears to be the floor rather than the ceiling for what the central bank will do to combat this relentless price pressure. The June CPI was expected to be hot, but today’s report downright burns. Consumer price inflation came in ahead of what were already lofty expectations, increasing 1.3%. Year-over-year, prices are up a scorching 9.1% which marks yet another new cycle-high (chart). Disturbingly for the Fed, the beat can largely be tied to greater strength in core inflation. Rather than easing up a touch and advancing “only” 0.5%, consumer prices excluding food and energy rose 0.7%. Making matters worse, the beat in core inflation was generally broad-based. Core goods inflation rose 0.8%, a tick faster than the 0.7% increase in May. Despite anecdotal reports that retailers have over-accumulated inventories, apparel prices jumped 0.8% in the month. New and used auto prices also climbed at a robust rate, increasing 0.7% and 1.6%, respectively. Core services prices were up 0.7% in June, led by the largest monthly gains in primary shelter since the mid-1980s, with rent up 0.8% and owners’ equivalent rent rising 0.7%. Also posting strong increases were medical care services (+0.7%) and transportation services (+2.1%). Travel services were one area to see prices give way, with lodging away from home down 2.8% and airfares down 1.8%. But the giveback in airfare was hardly impressive after two months of double-digit gains that leave prices still up 34% year-over-year. The resilient upward pressure on core goods prices over the past two months is an unwelcome development for the Federal Reserve. Easing core goods inflation was supposed to be the lone port in the storm in the second quarter amid surging food and energy prices and core services inflation that keeps marching higher. Instead, core goods inflation has risen at a torrid 6.8% annualized pace over the past three months. Core CPI as a whole is up 5.9% year-over-year, which is already much too high, but even this potentially understates the deterioration in the inflation data over the past few months. Over the past three months, the three-month annualized rate of core CPI inflation was 7.9%, which suggests core CPI inflation may have even accelerated in recent months. Coupled with low base effects ahead, we have likely not seen the year-over-year rate of core CPI peak yet.
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