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US CPI Inflation in June
In this Macro Flash Note, EFG chief economist Stefan Gerlach looks at the US CPI data for June.
US CPI inflation in June was much stronger than expected, rising 0.9% month-on-month and 5.4% year-on-year. Core CPI inflation was also strong, rising 0.9% month-on-month and 4.5% year-on-year. Market expectations were for inflation to start to decline slowly towards the Fed’s 2% objective for inflation1.
Chart 1. Monthly inflation in June
So far this year CPI inflation had been running a little high, but not so high as to appear incompatible with a simple inflation forecast made at the end of last year. That forecast predicted annual inflation to peak in May and start declining in June due to the large base effect related to the sharp price increase in June 2020.
The June data are plainly incompatible with that forecast as the new monthly price data were strong, easily offsetting the base effect. A simple calculation is instructive: for annual inflation to stabilise at 2.4% per year, the monthly inflation rate must average 0.2%. Yet monthly inflation has been much stronger than that since February and, importantly, has not shown any sign of moderating:
The net effect has been a continuous rise in annual CPI inflation to levels much above that predicted six months ago.
With the June data being so strong, the Fed is likely to reassess its views of the outlook for monetary policy. With 11 Federal Open Market Committee (FOMC) members not expecting an interest rate rise in 2022, five expecting a 25 bps increase and two expecting a 50 bps increase, a small change in sentiment among FOMC members is sufficient to change the outlook for monetary policy.
The high inflation rate also raises the likelihood that the Fed will announce that tapering of its bond purchases will start in early 2022.
Chart 2. Headline inflation
Chart 3. Core inflation
1 The Fed’s objective is for PCE inflation, which generally runs a little below CPI inflation (it was 3.9% in May). However, the two inflation rates are very strongly correlated, suggesting that PCE inflation is also like to have risen in June. The PCE data will be released on July 30.