News & Analysis

Headline inflation increased by 1.3% month-on-month in June, raising the year-on-year rate by 0.5 percentage points to 9.1%, the fastest pace of price growth since November 1981.

The increase in headline inflation was driven primarily by the rise in energy (+7.5% MoM), with used cars (+1.6% MoM), food (+1% MoM), and shelter (+0.6% MoM) also delivering notable contributions. More than 80% of energy’s 0.62pp contribution to monthly inflation came from a rise in gasoline prices. From a monetary policy perspective, the headline data can be chalked off due to the impact of external factors, but the composition of the core measure remained strong, suggesting that inflation will remain a primary concern for Fed officials in the coming months despite rapidly increasing concerns around US growth.

The sequential pace of core inflation accelerated from 0.6% MoM to 0.7% in June, printing 0.2 percentage points above expectations.

While this marks the fastest pace of core price increases since June 2021, it isn’t just the pace of core price growth that will concern FOMC officials. The breadth of price gains was wide, with components such as apparel continuing to rise in price despite expectations that elevated inventories would lead retailers to slash their prices. Even when stripping out food, shelter, energy and used autos–the four major supply-constrained components behind the recent rise in inflation figures–inflation printed at 0.7% MoM (6.1% YoY).

It’s an energy story after all: energy accounts for the bulk of the 1.3% MoM increase to headline June CPI

Although the White House pre-warned about the “dated” nature of today’s CPI report given the moderation in global commodity prices since the estimation period, assurances out of Washington weren’t able to prevent a strong reaction in markets.

In response to today’s inflation report, front-end Treasury yields rallied by around 13 basis points, taking the 2-year to levels last seen on June 22nd. Facing pressure from higher US rates, the majority of G10 currencies fell against the dollar. This included EURUSD, which after days of speculation and continued dip buying briefly broke parity for the first time since 2002. As markets continue to assess the Fed’s ability to tame inflation in light of today’s elevated print and strong composition, speculating on the need for a third successive 75bp hike in September in order to do so, the dollar will remain well supported in markets.

EURUSD briefly breaks parity for the first time since 2002 following today’s strong inflation report

 

 

Author: 
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst

 

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