What happened: The Bureau of Labor Statistics’ Consumer Price Index rose 5.4 percent in June from the same month a year ago, up 0.9 percent on a month-over-month basis. Core prices – with fuel and food costs excluded – increased 4.5 percent year-over-year, also up 0.9 percent from May. The prints were much higher than economists’ expectations, which were around 4.9 percent and 4.0 percent, respectively.
The dollar index leapt 0.25 percent higher, and 10-year Treasury yields jumped through the 1.38 percent threshold after the release.
Core inflation grew at the fastest pace since November 1991: The core price measure, which should theoretically be less influenced by short-term changes and more representative of underlying economic trends, continued rising at a historic pace. The “super-core” inflation statistic, which ignores costs of shelter and used vehicles, rose by 3.6 percent year-over-year – the highest rate since April 1993.
Base effects are fading out: Prices recovered substantially in June 2020, jumping 0.5 percent from the previous month – close to a 6.5 annualized growth rate. While year-over-year computations will yield overstated results for the next 10 months, the price level index has already caught up with its pre-pandemic trend. In other words, most consumer goods are now more expensive than if the pandemic had not taken place.
Expectations are starting to shift: On Monday, the Federal Reserve Bank of New York published the results of its June 2021 Survey of Consumer Expectations. The monthly report showed that median inflation expectations increased to 4.8 percent at the one-year horizon, from 4.0 percent. The three-year horizon expectations remained unchanged at 3.6 percent, but the difference between the upper and lower forecasts reached a new series high, indicating a greater degree of uncertainty around the future path of prices.
But the Federal Reserve is likely to remain steadfast: Chair Powell will testify before the US House Committee on Financial Services tomorrow, and the Committee on Banking, Housing, and Urban Affairs and Senate on Thursday. We expect Powell to maintain the tone of previous speeches, characterizing the inflation pressures as “temporary”. He will likely also emphasize that the committee’s standard of “substantial further progress” has not been met yet, and that downside risks to price pressures remain significant.
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