U.S.: Consumer Prices Rise Much More than Expected in June

Daily Forex Fundamentals | Written by TD Bank Financial Group | Jul 16 08 14:07 GMT |


* U.S. headline CPI was much higher than expected in June, rising by 1.1% M/M, bringing the yearly inflation rate to 5.0% Y/Y.
* Core CPI was also higher than expected, rising by 0.3% M/M, with the annual rate of core price inflation climbing to 2.4% Y/Y.
* The report was all-round ugly, with the extent of the price increases being fairly broadly-based.

U.S. consumer price inflation rose by a very strong 1.1% M/M in June. This was much higher than the 0.7% M/M increase expected by the markets and was the biggest monthly increase in this indicator since September 2005. On an annual basis, consumer price are up 5.0% Y/Y, again well above the market consensus for a more modest 4.5% Y/Y print. This is the highest print on headline inflation since February 1991. Core inflation was also somewhat stronger than expected on the month, rising by 0.3% M/M, compared to market expectations for a 0.2% M/M rise. On a year-ago basis, core consumer prices are now 2.4% Y/Y, again higher than the 2.3% Y/Y expected by the markets. The 3-month annualised trend for core inflation now stands at 2.5% (up from 1.8% in May), while the 6-month annualised trend has also risen, climbing to 2.3% in June from 2.1% in May.

The details of the report were fairly ugly, with most categories posting price gains on the month. In addition to the strong gains in energy prices, which rose by 6.6% M/M (following the 4.4% M/M increase in May), there were strong gains in the price of food (up 0.8% M/M) and housing (up 0.5% M/M). Moreover, the service side was just as strong, with a 0.5% M/M increase during the month. As expected, much of the gains in energy prices were on account of the astounding 10.1% M/M gain in fuel prices, which is almost double the 5.7% M/M gain the month earlier.

This report gave further justification to the Fed's concern about the elevated consumer price pressures in the U.S., even in an environment of sluggish domestic demand. However, the tone from the recent remarks by Chairman Bernanke in his testimony before Congress suggests that the Fed is unlikely to engage in hiking rates in the near-term. Nonetheless, this report certainly gives some credence to the market consensus that the next move by the Fed will be a hike – a view we have held for some time now, though we do not expect any hikes until well into 2009.

TD Bank Financial Group