- US core CPI was flat, total CPI lower in June…
- ...prompting a rally in rates and pushed out Fed hike pricing
- US CPI / core CPI, m/m % SA, June:
- Actual: -0.4 / 0.0
- Scotia: 0.1 / 0.3
- Consensus: -0.1 / 0.2
- Prior: 0.5 / 0.2
Receiving July OIS paid off this morning as US inflation came in well below expectations. The US 2-year Treasury yield rallied 10bps with 10s down 5bps in a bull steepener move that drove a weaker dollar and higher equities. OIS pricing for the July 29th FOMC decision fell by 7bps to just 3bps, reversing all of yesterday’s overreaction to Governor Waller’s guidance.
US CPI inflation landed sharply weaker than everyone expected for the month of June. That’s true of headline CPI that fell -0.4% m/m SA and it’s true of core CPI ex-food and energy that was flat. Chart 1 shows the bottom falling out of core CPI.
The three-month moving average for core CPI now stands at 2.3% m/m SAAR. Five-months it’s 2.4%. YTD it is 2.6%. The past two months has run at 1.2%. Get the drift? At least going by core CPI we can safely offer the view that the US economy’s allegedly massive inflation problem is grossly overstated.
Breadth of inflationary pressures also fell (chart 2).
The weakness came through both core goods inflation (chart 3) and core services inflation (chart 4). The bottom fell out of both. Core goods inflation (ex-food and energy commodities) fell –1.2% m/m SAAR. Core services inflation (ex-services related to housing and energy) fell by 4.9% m/m SAAR.
Taking account of weighting differences in the CPI and PCE baskets, we can so far suggest that headline PCE that is due out in a couple of weeks is tracking a drop of –0.3% m/m SA with core PCE tracking similarly to the flat core CPI reading. Let’s see what tomorrow’s PPI components that matter to PCE say but I’m leaning toward more downside.
Just like nonfarm, we have to ask where did the World Cup effect go? Chart 5 shows a liberal definition of the categories that could reflect World Cup activity.
As charts 6 and 7 show, this was an unusually weak month of June compared to all prior months of June for m/m seasonally unadjusted core CPI price changes and an unusually low month for the seasonal adjustment factor compared to prior months of June. The combination sent the m/m SA core CPI reading to a flat print.
This, in turn, cautions against overinterpreting the readings. They could be either higher or lower, but the risks would be higher than reported in my view. There is a recency bias to SA factors and how they are calculated. There are also ongoing sampling issues like the share of the basket that is estimated by proxy methods which has been around 40% for a while and which will be updated later today.
Charts 8–16 break down parts of the basket by component.
Charts 17–18 break down the basket in y/y and weighted y/y contributions.
Charts 19–20 do likewise to m/m SA prices.
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