Inflation surged far more than expected in the world’s largest economy last month, hotly-anticipated data released on Tuesday showed.
Headline CPI rose 5.4% in June, the BLS said. That easily exceeded the 4.9% rise the market expected (figure below).
Core was similarly searing, printing 4.5% YoY, half a percentage point higher than anticipated and the largest YoY reading since 1991.
The headline annual read is the largest since August of 2008. Headline inflation has now logged seven consecutive gains.
Perhaps most notably, core rose 0.9% MoM (figure below). That was more than double the expected 0.4% increase. “Many of the same indexes continued to increase, including used cars and trucks, new vehicles, airline fares, and apparel,” the government said. “The index for medical care and the index for household furnishings and operations were among the few major component indexes which decreased in June.”
This marks the second time in 2021 that core prices have posted the largest monthly gain since 1982.
The index for used cars and trucks rose 10.5% from May and 45.2% on an unadjusted, 12-month basis. Energy prices were up sharply MoM and (obviously) YoY.
The food at home index posted a monthly gain (0.8%) that was double that seen in May. It wasn’t anomalous in any sense (figure below), but the trend is concerning.
However, the monthly rise in the food away from home index was the largest in decades (figure below).
Note that restaurants are having a difficult time staffing up for the summer, forcing many operators to offer incentives, driving up the cost of labor. Add that to rising input costs and you have a recipe (no pun intended) for higher consumer prices.
“Overall, a continuation of the pandemic-specific pockets of inflation, although questions regarding the ‘transitory’ characterization are sure to emerge in the wake of yet another stronger-than-expected inflation print,” BMO’s Ian Lyngen said Tuesday.
It’s entirely possible to persist in the “transitory” narrative for the time being, but it goes without saying that this doesn’t help. “Maybe it’s bottlenecks, but it sure isn’t just base effects these days,” Bloomberg’s Cameron Crise wrote, adding that “either way, it’s hard to see why anyone who was concerned about inflation six weeks ago wouldn’t be more so after this.”
It’ll be interesting to see how the bond market responds. Remember: It’s been all about the implications of an accelerated Fed tightening since the June FOMC. The idea that the Fed will bring forward the taper timeline, thereby implicitly accelerating liftoff, served to push long-end yields lower, flattening the curve.
To the casual observer, that price action appeared paradoxical. The read-through was simple enough, though. The market priced in reflation months ago. With the Fed’s hawkish pivot and attendant questions about the Committee’s commitment to FAIT in the face of scorching inflation, bonds were preemptively pricing in the economic impact of tighter policy and the assumed drag on the economy.
I have discounted numbers until the fall- the numbers being released now have way too much noise. That said, inflation is the lesser of two evils for now. Imagine if prices were stagnant or worse yet falling. Bond market action suggests UST bonds are discounting an earlier Fed tightening- intermediates are getting hit harder than long bonds- a bear curve flattener. It all smells of a whipsaw for the Federal Reserve. About the time they belly up to the bar, start tapering and debating raising short rates is about the time we see the whole thing roll over. This should not be lost on Biden and the Congressional Democrats. A fairly large fiscal stimulus will innoculate them politically. Failure to pass a decently robust fiscal agenda will cost them bigly in 2022 and bring back talk of Trump in 2024.
Good comment. More inflation and more bear flatterning this morning continues to suggest that positioning is still having an outsize effect vs actual macro and regime shifts.
Agree with Ria. This summer is unique. Stimulus money, childcare tax credit, and all the things we couldn’t do last summer are happening. When does the sugar high wear off? If we get a prediction pool going, I’ll take major Black Friday followed by Cyber Monday crash.
Anecdotal evidence-This year, I bought new furniture, new TV, installed new wood flooring, upgraded my truck suspension, bought a cargo trailer, and went on a second honeymoon type trip. These are all one-time kind of spending. I’m still waiting for some backordered parts out of Germany. The couch took 3 months to arrive. This level of spending isn’t sustainable for me, and it isn’t for my friends either, who are all also having really great summers.
I’d be more concerned if the inflation print undershot the target at this point given the monetary policy since 3/2020…the FOMC being tested about FAIT is inevitable since they basically and brazenly invited it with the monetary bazooka and the jawboning…
I just have no idea what / if any the specific timeline for “transitory” is … I just assume it’s a working / potentially moving target as things progress or regress…
Anecdotal evidence – a couple weeks ago I stopped in my favorite Italian sub sandwich joint for lunch. The place is tiny but does a robust daytime carry-out business. The place is owned by an older Italian woman who takes the orders, works the register, and calls everyone “Honey” and “Sweetie”. She has a large hand-painted sign on the wall showing the list of subs and ingredients.
That day the sign was down. I asked about it, and she leaned forward in all seriousness and said that she has to have it re-painted because she had to raise her prices because the cost of everything was going up.
This hard-working sandwich maker is not about to have her large hand-painted sign re-painted with lower prices once this inflation spike “transits”. Those prices are not coming back down.
As I completed my purchase she looked over her glasses at me and in her simple analysis said, “It’s all politics.”
I give her a lot of credit