June’s CPI inflation report was one of the biggest misses in history! What a crazy week, and it’s only Tuesday. So far we’ve had an escalation of the Iran conflict, oil prices are back over $80, the Federal Reserve hawks have been talking about a July rate hike and now the inflation report was an epic miss to the downside.
Let’s take an in-depth look at the inflation report and why a July rate hike should now be off the table.
From BLS: The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent on a seasonally adjusted basis in June after rising 0.5 percent in May, the U.S. Bureau of Labor Statistics reported today. This decline in the all-items index was the largest 1-month decrease since April 2020, when it fell 0.8 percent. Over the last 12 months, the all-items index increased by 3.5 percent before seasonal adjustment.
Now the 12-month inflation data is still above the 2% target level for sure. Fed Chairman Kevin Warsh said this in prepared testimony to Congress today: “If we get policy right—and we will—the inflation surge of the last five years will be a thing of the past.”
With this statement, it would appear that future rate hikes are still on the table, but the July rate hike is off. Headline inflation is running at 3.5%, but that is working off oil prices, which, as we all know, can be wild. Core 12-month inflation is closer to the Fed’s target.
But is this the reason the July rate hike is off the table? No.
Month-to-month inflation data matters more
Yesterday I wrote about inflation week and what the Fed’s looking at, and it was the topic of today’s episode of the HousingWire Daily podcast as well. In the past few days, the Fed told everyone that month-to-month data matters more now and that a July rate hike would be on the table if inflation worsens. Well, the month-to-month inflation data was flat.
If we are to take the Federal Reserve at their word, the July rate hike should be off the table.
Conclusion
Now, I know the conflict is picking up and oil prices have gone above $80 again this morning. I expect some Fed officials to say negative things about oil prices if this continues, because they did earlier in the year. Interestingly, they didn’t say anything positive about oil prices falling; in fact, Cleveland Fed President Beth Hammack said this might be bad for inflation because people have more money to spend. This might be one reason why the 10-year yield isn’t much lower today given the inflation news, only trading at 4.57%.
For now, the July rate hike is off the table and we have to take the economics headlines one day at a time. The conflict will continue to be an issue for the bond market and for the Fed until it’s resolved.
