In May, core CPI did something it’s never done previously: fall for a third consecutive month.
Once again, indexes for apparel, gas, and transportation services fell, while food at home prices rose, a juxtaposition emblematic of the pandemic’s Harvey Dent character — the biggest demand shock in at least a century is a deflationary supernova almost by definition, but the virus is also a supply shock in many respects.
This has fueled an increasingly vociferous debate about the longer-term impact of COVID-19. Will it push the developed world into outright deflation? Or will on-shoring, supply chain disruptions, and a reinvigorated protectionist push lead to inflation?
That debate won’t be settled for a while, but it serves as the context for June’s CPI data in the US.
The numbers show headline and core rising 0.6% and 1.2% YoY, respectively.
That means core is stuck at the slowest annual pace in nearly a decade.
As for the MoM core print, it rose for the first time in three months in June, snapping the historic streak mentioned here at the outset.
The 0.2% gain was double the 0.1% the market expected.
The gasoline index jumped by more than 12%, accounting for more than half of the monthly increase in the all items index. More broadly, the energy index rose 5.1% last month.
Notably, food at home prices kept rising, jumping 0.7% in June on the heels of May’s 1% gain and April’s 2.6% rise, which was the biggest monthly increase in 46 years.
Does any of this matter? Is it incremental at all?
Well, that’s certainly debatable. It makes no difference for the Fed, which would be more than happy with (more than) a little inflation. As for rates, last week clearly suggested that to the extent long-end yields are poised to break out of the range, it’ll be because of some development on the virus front, not any “stale” data.
Clearly, the re-opening push is no longer “on track”, as states representing more than half of the US population have either paused or rolled back their plans, with California’s Monday announcement being one of the more dramatic examples yet.
“The reintroduction of stay-at-home orders also lengthens the period of ‘mid-pandemic’ data and thereby renders any near-term updates as old information even before they hit the tape”, BMO’s Ian Lyngen and Jon Hill wrote Tuesday.
That about sums it up. But the deflation/inflation debate around COVID-19 will go on, and remain unsettled, probably for years.
