The Worst Inflation Report In Modern US History

US consumer prices rose 9.1% from a year ago, blazing-hot data released on Wednesday showed.

The harrowing figures were guaranteed to embolden the Fed on their quest to rein in the highest inflation in four decades with another super-sized rate hike later this month.

The core gauge was likewise hotter than anticipated. Excluding food and energy, prices rose 5.9% YoY, easily higher than the 5.7% economists expected.

As Jerome Powell was keen to point out during last month’s post-FOMC press conference, it’s headline inflation that matters to everyday people, not core. Most Americans, Powell said, “don’t even know what ‘core’ is.”

Fed officials have repeatedly emphasized that they’re primarily concerned with the monthly inflation readings. Unfortunately, there was no relief on that front either. In fact, the situation worsened considerably.

The headline gauge rose 1.3% in June from the prior month (figure below), matching the highest estimate and more than doubling the lowest.

The MoM core print was a bitter disappointment for those hoping to see some evidence of receding price pressures. Core prices increased 0.7% from May. Economists expected a 0.5% increase.

Notably, June’s MoM headline print marked the second-hottest sequential reading since March of 1980 (figure below).

Again: It’s headline inflation that matters to consumers. And headline CPI is rising at the swiftest monthly clip in more than 42 years.

The breakdown was disastrous. Every major category posted an increase from May to June except for fuel oil, and the 1.2% MoM decline there was small comfort considering the 98.5% YoY increase.

The food gauge rose 1% — again. June marked the sixth consecutive month during which food prices have increased 0.9% or more (figure below).

Worse, the food at home gauge notched another 1% increase. Grocery prices have risen at least 1% during every single month in 2022.

On a 12-month basis, the food at home index notched a 12.2% increase. Outside of the 70s and 80s, the current annual pace of grocery price inflation is basically unprecedented in modern American history.

Similarly, electricity prices are rising at a 12-month rate that has very little historical precedent. It’s exceedingly rare that both food at home and electricity prices experience double-digit YoY increases simultaneously (figure above). Piped gas rose 8% MoM for a second consecutive report.

There was no respite to be found in used vehicles, the category many economists hoped would eventually contribute to a waning inflation impulse. Prices for used cars and trucks rose 1.6% in June after a 1.8% increase in May. Apparel prices rose the second most of 2022.

Disconcertingly, albeit predictably, the shelter gauge rose 0.6% for a second straight month. It’s now increased by at least 0.5% for five straight months. OER rose 0.7%, the most in decades.

All in all, June’s CPI report was yet another unmitigated disaster. In many respects, it was worse than May’s report, which is really saying something considering how bad those figures were. In fact, it’s probably fair (i.e., not too much of an exaggeration) to say June’s CPI numbers were among the worst in US history.

It was, of course, May CPI which tipped the scales in favor of the largest rate hike since 1994 at the June FOMC meeting.

Following Wednesday’s data, markets began to price in some chance of a 100bps hike at the July gathering. BMO’s Ian Lyngen called that “unsurprising.” “We expect the conversations regarding a 100bps hike to pick up in earnest,” he said.

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17 thoughts on “The Worst Inflation Report In Modern US History

  1. As of this morning it really does not look like the marker has priced this in… yet.
    The NASDAQ and growth stocks should probably reprice for even more compression, and this level of Inflation has to be eating away at earnings.
    As the dollar gets even stronger businesses that sell abroad are also going to see reduced sales.

  2. It looks like 100bp hike is priced at 30% odds by the bond market. Yes the bears are in control there. No use in fighting the tape, but credit spreads are widening, the yield curve is inverting more and other finncial conditions are clearly tightening. The odds of a soft landing are nil in my view and a softish landing is receding in the horizon. Gas prices will likely continue to decline after summer driving season ends. Should be very interesting 4th quarter in the USA. The range of outcomes is increasing in markets now.

    1. Why the $#@! Is the Nasdaq up, S&P up and Vix down???? Surging inflation, surging dollar, central banks hiking in desperation, corporates warning on margins, power grid outages, emminent european gas crisis, reuninification of Taiwan… Oh, and a war. Rally ???

      1. Well we never know how much of the news or even how much worse news has already been priced into a market. And there is a lot of short term trading, where you wait for a fairly predictable sell off on the CPI news and after a quick move down of 1 to 2% you bottom fish and buy and then sell after a 1% rise. This is not a buy and hold market anymore it is a trader’s market.

        And the technicals which inform much trading were way over sold and need some upside movement to ease that condition, so that they can fall further in the near future. Plus, we have been attempting to rally more than a few percentage points for a month now and the very fact that the worse news today did not take out the recent lows means that under the surface buyers are more existent than the headline news would indicate. If it was easy and obvious we would all be rich. Embrace the paradox and know that the market will always do the opposite of what most of us expect.

      2. I expect the next leg down will happen once inflation peaks and people see that the central bank continues to tighten: 3 months from now?

  3. Commodity prices have rolled over to look deflationary here in July. Ags (milk, wheat, soy, sugar, rice, etc) mostly peaked in June and are lower here (-10% to -15% typical) in mid July, with proteins (cattle, hogs) slowest to decline. Metals mostly peaked in spring and are sharply lower now. Energy peaked in mid June and is in a downtrend now (Dutch NG aside).

    That didn’t show up in the June CPI, I’m not sure how long it takes for lower cmdty px to be reflected in retail prices. Price/mix for grocery is still double-digit positive on YOY but what matters is MOM which I don’t see; volume is negative YOY. With lower input prices and constricting demand, it feels to me like the non-core part of CPI MOM could start visibly easing this summer.

    Wages and housing are potential sticky, laggy spoilers for core CPI.

    1. High frequency, private market rent data has shown slowing YOY rent inflation (sadly, MOM not reported) since the beginning of 2022. You can also see this in MFD REIT reports and stock prices.

      Here is an argument for why this presages shelter CPI YOY (again, would prefer to know about MOM) peaking and starting to roll in fall (Sept-ish?), i.e. a 9 month or so lag.

      Add the reasons to expect non-core food and energy CPI to start rolling over in next couple months, plus inventory burn, dismal business and consumer sentiment, and the risks of severe, demand-kneecapping recession in Europe, and the “peak inflation” scenario looks more plausible, to me anyway.

      I realize that “rocketing inflation with no end in sight” is all over the media right now, but investors need to be forward-looking. The classic inflation hedge asset classes are saying as much.

  4. Can someone explain this to me like i’m 5?

    If consumer prices are high, the Fed responds by raising rates, hoping for demand destruction — but rising rates also causes demand for USD/treasuries to increase, making those imports cheaper on a relative basis, thereby causing increased demand… right? I mean, does raising rates still make sense when everything consumers buy is made overseas?

    1. Sure Jon Boy. It’s like playing Monopoly with the ‘rich rule’ because Jon, the rich rule. Rich Rule: The one with the most hotels (the big red pieces) can change the rules at any time. Example: you roll a seven and the rich ruler tells you that you have to move backwards onto his hotel because seven is an odd number. This game is meant to prepare you for real life Jon. No No, please don’t flip the board and stomp away mad.

    2. Raised rates isn’t really directly Consumer/consumption. Increased cost of borrowing slows businesses (and large purchases/projects – think anything that requires bonds to fund it). That will hit corporations who reduce spending and hiring…

      1. Agree totally. Inflation is hitting the consumer/consumption as each dollar is buying less, especially when talking about food, rent or energy/gas/electricity. After essentials, the consumer has much less to spend.
        The impact of the rate hikes will be seen in the months to come as the higher interest rates impact small businesses (curtail and/or cut back on spending) and large corporations.
        We are already seeing evidence/suggestions of cutbacks in large and still very profitable corporations (Tesla, Oracle, Facebook, Microsoft,…) who all seem to be looking to cut costs. And it will not be the C-suite executives you will be bearing the brunt of the cuts.

        1. The cure for rising prices is rising prices, yes but… We are in a battle between oligopic corporations and consumers. In that battle corporations count interest costs simply as another cost that can be passed on to consumers. And for consumer basics, the demand is sticky downward.
          I guess my only point is that we have allowed an economic structure to develop that supports corporations ( capital) and crushes the consumer ( labor).
          When I reread this I think my reaction is “thank you Mr obvious”.

    3. Jon, only some stuff is imported; mostly cheap consumer goods from China. Most commodities are priced in USD so a higher USD does not make it cheaper for US consumers. That would apply to oil and foodstuffs, which the US produces a lot of and these are big drivers of inflation. Last fall the YoY increase in demand for goods was about 20%. No supply chain or industry can possibly deal with that kind of increase in demand. As no one in the US will ever ask folks to consume less, as consuming is our secular religion, they instead will let the Fed break the legs of the consumer instead; with all attendant collateral damage.

  5. Ouch! Modern times? To me modern times is anything in my lifetime and I remember the 70’s intimately, like it was yesterday…

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