For the second month in a row, core CPI came in hot, a development that raises at least a few questions about Fed cuts and the tariffs.
On July 11, market participants had a hearty laugh at Jerome Powell’s expense when data showed core consumer prices jumped 0.3% in June, just a day after the embattled Fed chair emphasized repeatedly during congressional testimony that his characterization of subdued inflation as “transient” might have been off base.
“There’s a risk that weak inflation will be even more persistent than we currently anticipate”, Powell told lawmakers.
Given his newfound insistence on the purported intractability of subdued inflation (in the interest of justifying July’s “insurance” cut, of course), the hot June core CPI print was something of an “egg on your face” moment.
Well, now, we’ve got a second month of hotter-than-expected gains on core. The 0.3% print for July came against expectations for a 0.2% rise. YoY, core rose 2.21%, also ahead of estimates, and the hottest in six months. (The headline MoM print was in line, while the YoY read was slightly hot.)
Once again, the gains had an “across-the-board” character to them. “The July rise was broad-based, with increases in the indexes for shelter, medical care, airline fares, household furnishings and operations, apparel, and personal care all contributing to the increase”, the BLS said. “The index for new vehicles was one of the few to decline in July”.
Sure enough, Treasurys fell, the curve flattened, the dollar rose and markets priced in less easing for 2019 following the numbers.
Is this going to deter Jerome Powell and co.? Well, that depends on what you mean by “deter”. He and his compatriots seem bent on emphasizing “uncertainty” when it comes to justifying a dovish slant, and there’s no shortage of uncertainty. Between Trump’s trade escalations, the yuan devaluation, Hong Kong upheaval and now a crisis in Argentina, the global outlook is about as fraught as it’s been in years.
That said, every passing data point which suggests that inflation is firming and the labor market remains some semblance of “hot”, makes it a little harder to be a Fed voter. It doesn’t help that the prospective next round of tariffs will disproportionately target consumer goods, which will almost surely push up prices.