US June CPI comes in hotter than expected

U.S. consumer prices rose by the most in 13 years in June amid supply constraints and a continued rebound in the costs of travel-related services from pandemic-depressed levels as the economic recovery gathered momentum.

The consumer price index increased 0.9% last month after advancing 0.6% in May, the Labor Department said on Tuesday. Year to year, the CPI jumped 5.4%, the largest gain since August 2008, following a 5.0% increase in the 12 months through May.

Excluding the volatile food and energy components, the CPI accelerated 0.9% after increasing 0.7% in May. Core CPI surged 4.5% on a year-on-year basis, the largest increase since November 1991, after rising 3.8% in May.

MARKET REACTION:

STOCKS: S&P e-mini futures extended slight losses and were last off 0.33%, pointing to a soft open on Wall Street

COMMENTS:

JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND, VIRGINIA

“The headline CPI numbers have shock value, for sure; however, once you realize that a third of the increase is used car prices, the transitory picture becomes more clear. Inflation is rising, but things are well behaved and have not changed materially.”

KEN POLCARI, MANAGING PARTNER, KACE CAPITAL ADVISORS, BOCA RATON, FLORIDA

“It came in very hot, much hotter, so it is going to be difficult for the Fed or any of the talking heads to try to talk it away as transitory. It raises the conversation, it is significantly stronger and that plays right into the ongoing inflationary concerns. Tomorrow you are going to get PPI and that is also expected to be stronger, and that is at the producer level which only means a couple of months later after you see it at the producer level it comes down to the consumer level on top of what we already have.

That is going to cause some consternation, between that and what we are seeing already in some of the earnings reports – JP Morgan and Goldman – certainly blowing the roof off the house but you don’t see this big explosion to the upside. You see it is more moderated and the market might get a little bit weaker today.”

GENNADIY GOLDBERG, INTEREST RATE STRATEGIST, TD SECURITIES, NEW YORK

“There are a lot of reopening-driven factors at play. Right off the bat I can see very strong rebound in used car prices, another strong rebound in airfares and lodging as well, all of these are COVID impacted.”

“A lot of this will play into the Fed’s transitory story. There is certainly some concern that some of these price increases are coming in much quicker than expected, but you can argue that a lot of this is due to the recovery.”

“The approach that they took at the last meeting was one of risk management, it wasn’t putting FAIT (flexible average inflation targeting) on the backburner, it was basically saying inflation is coming in a little bit stronger than expected therefore we are going to shift our stance modestly. We still believe in FAIT, we’re still going to let inflation run a little hot, but a lot of this is transitory and a lot of this is reopening related. I don’t think there is anything here to really change that stance.”

EDWARD MOYA, SENIOR MARKET ANALYST FOR THE AMERICAS, OANDA, NEW YORK

“That came in pretty hot and we saw short end rates jump pretty solidly here and the move was very positive for the dollar. This is really going to excite the hawks on the Fed and intensify the debate to taper sooner, and if these inflation pressures are still elevated by the time we’re at the end of the year, you’re going to see the market start to move forward interest rate hike expectations.”

NANCY DAVIS, FOUNDER, QUADRATIC CAPITAL MANAGEMENT, GREENWICH, CONNECTICUT (email)

“Tuesday’s elevated Consumer Price Index is more evidence that prices for goods are rising across the board, something that consumers have been noticing for months at the grocery store and at the gasoline pump.

“The Consumer Price Index may not be the best inflation measure, as one-third of the index’s calculation is defined by shelter, which is primarily housing rent in cities. We have seen a significant divergence in real estate markets across the country – housing prices are falling in many cities due to increased demand for housing in suburbs, a trend caused by the pandemic.

“We expect the Federal Reserve to allow inflation to overshoot its inflation target in order to attain full employment. The market is currently pricing in close to four 25 bps interest rate hikes by the end of 2023, which is aggressive in our view.

“I believe investors have only just started to think about inflation. The 10-year Treasury yield is significantly below the rate of inflation and a continuation of that dynamic would likely create challenges for fixed income investors.”

JIM VOGEL, FIXED INCOME STRATEGIST, FHN FINANCIAL, MEMPHIS, TENNESSEE

“So we’ve got a flatter curve, we’ve got a lot of increase in the three-year (U.S. Treasury note) as you should anticipate, the five-year is under some pressure, the 30-year is not. And so right now, I would call this a tame reaction as people try to dig into all of these numbers because they don’t want to get wrong footed in the way they did after the May CPI.”

MICHAEL BROWN, SENIOR ANALYST, CAXTON, LONDON

“(This was) clearly an upside surprise. It will make (Federal Reserve Chairman Jerome) Powell’s testimony on Capitol Hill tomorrow a much trickier exercise than it would’ve otherwise been given that it will put some additional pressure on the ‘transitory’ narrative.”

“FX reaction as one would expect given an upside surprise, with the dollar rallying across the board in line with the sharp rise in Treasury yields. All relatively contained however, within recent ranges, and one print won’t significantly change the FOMC’s outlook/stance. Attention now shifts to Powell’s comments tomorrow, and where we are in the tapering discussion.”

KATHY LIEN, MANAGING DIRECTOR, BK ASSET MANAGEMENT, NEW YORK

“It was a very, very strong number – strongest in 13 years. Clearly it was very positive for the U.S. dollar. It kind of reinforced the Fed taper story and the dollar has been consolidating for the front of the week and I think this was the kick that it needed to renew its gains.”

PAUL HICKEY, BESPOKE INVESTMENT GROUP, NEW YORK (email)

“Futures were mixed ahead of the June CPI report, but a much higher than expected print has been met initially with selling in equity futures and rising bond yields. So far, the declines haven’t been too large, but as traders digest the internals of the report, we’ll be watching to see how things play out. One driver of the gains this month was used car prices which rose 10.5% m/m and accounted for one-third of the total increase. New car prices also increased by 2.0% m/m which was the largest m/m increase since 1981!”