U.S. Peak Inflation Hopes After July CPI Flat 0.0% m/m Down from+1.3% in June

US consumer inflation hit +8.5% y/y vs +8.7% expected. Core CPI fell to 5.9% y/y vs 6.1% expected and 5.9% prior. CPI in July stalled m/m 0.0% m/m vs +0.2% expected and +1.3% prior. Core CPI rose +0.3% m/m vs +0.5% expected and +0.7% prior. With the pullback in oil prices CPI energy -4.6% vs +7.5% prior with Gasoline -7.7% vs +11.2% prior. Despite the noise inflation is uncomfortably high, an example owners’ equivalent rent portion of CPI +5.8% y/y, fastest gain since September 1990.

Inflation

US interest rate Futures after the report are pricing in an implied odds of a 50-bps hike in September down to 32% from 68% yesterday.

The fed funds futures market was pricing in a 32.0% probability of a 50-basis point rate hike at the September FOMC yesterday. After the July CPI release, that view has shifted markedly. The fed funds futures market now sees a 60.5% probability of a 50-basis point rate hike at the September FOMC meeting, according to the CME FedWatch Tool.

Treasury yields moved sharply lower immediately after the CPI release. The 2-yr note yield, which was at 3.27% before the release, is down 14 basis points to 3.12%. The 10-yr note yield is down four basis points to 2.76%.

The US dollar fell hard on these headlines with equity futures soaring. USD/JPY is down 200 pips to 133.17 with S&P 500 futures up 73 points.

However, the war is hardly won against high prices. The Fed is likely to want further evidence of an inflation slowdown at a July 27 news conference, Fed Chairman Powell said another 0.75-point rate rise could be on the table at the September meeting but would “depend on the data we get between now and then.”

Update US Major indices at lunch

  • Dow 33261.79 +485.50 (1.48%)
  • Nasdaq 12796.02 +302.14 (2.42%)
  • SP 500 4199.56 +77.02 (1.87%)

Increases in the cost of food, electricity and shelter were the largest contributors again to the monthly rise, the Labor Department said

US July 2022 Highlights

CPI

  • US CPI (Y/Y) Jul: 8.5% (est 8.7%; prev 9.1)
  • US CPI (M/M) Jul: 0.0% (est 0.2%; prev 1.3)
  • The food index up 1.1% month-over-month, versus 1.0% in June, and is up 10.9% year-over-year.
  • The energy index down 4.6% month-over-month, paced by a 7.7% decline in the gasoline index and an 11.0% decline in the fuel oil index. The energy index is up 32.9% year-over-year.
  • The shelter index up 0.5%, with the rent index up 0.7% and owners’ equivalent rent index up 0.6%. The shelter index is up 5.7% year-over-year.
  • The transportation services index dropped 0.5% month-over-month but remains up 9.2% year-over-year.
  • The apparel index declined 0.1% month-over-month and was up 5.1% year-over-year.
  • The user cars and trucks index fell 0.4% month-over-month and was up 6.6% year-over-year. The new vehicles index climbed 0.6% month-over-month and is up 10.4% year-over-year.

Core inflation:

  • US CPI Core (M/M) Jul: 0.5% (est 0.5%; prev 0.7)
  • US CPI Core (Y/Y) Jul: 5.9% (est 6.1%; prev 5.9)

Real Earnings

  • US Real Avg Hourly Earnings (Y/Y) Jul: -3.0% (prev 1.3)
  • US Real Avg Weekly Earnings (Y/Y) Jul: -3.6% (prev 1.3)
  • US Real Avg Weekly Earning +0.5% vs -1.0% m/m prior

Real weekly earnings are down for a record 16th consecutive month. Inflation-adjusted earnings have declined for 89% (16 of 18 months). However average earnings increased last month, up a half-percent in July. This is the first real earnings increase since Sep 2021.

US Real Earnings

Many analysts had expected March, clearly, they have been mistaken to mark the inflation peak although the war in Ukraine is far from over, supply chain bottlenecks persist, and consumer demand remains elevated which is likely to weigh on the CPI.

Monthly Price Increases

  • CPI energy -4.6% vs +7.5% prior
  • Gasoline -7.7% vs +11.2% prior
  • New vehicles +0.6% vs +0.7% prior
  • Used vehicles -0.4% vs +1.6% m/m prior
  • Owners’ equivalent rent +0.6% m/m vs +0.6% prior
  • Food +1.1% vs +1.0% prior

Yearly Price Increases

  • Energy CPI rose by 32.9%, after hitting a 42-year high of 41.6% in June mainly due to a big slowdown in gasoline costs (44% vs 59.9%), fuel oil (75.6% vs 98.5%), and natural gas (30.5% vs 38.4%)
  • Electricity prices accelerated (15.2%, the most since February 2006).
  • Cost also slowed for new vehicles (10.4% vs 11.4%) and airline fares (27.7% vs 34.1%),
  • Inflation continued to march higher for food (10.9%, the largest increase since May of 1979, vs 10.4%); shelter (5.7% vs 5.6%); and used cars and trucks (6.6% vs 1.7%).
  • Gas: +44%
  • Fuel Oil: +75.6%
  • Meat, Poultry, & Fish: +9.3%
  • Milk: +15.6%
  • Eggs: +38%
  • Baby Food: +15%
  • Coffee: +20.3%
  • Public Transportation: +19%
  • Airline Fares: +27.7

The hope was the slowdown in April was a sign that inflation had probably peaked, the inflation is unlikely to fall to pre-pandemic levels any time soon and will remain above the Fed’s 2% target for a long time as supply disruptions persist and energy and food prices remain elevated.

US CPI July 2022

United States Consumer Price Index (CPI)

 

United States Inflation Rate

Core Inflation y/y

United States Core Inflation Rate

Food

United States Food Inflation

Food inflation in the United States accelerated for a 14th straight month to 10.9% in July, the highest since May of 1979. The food at home index rose 13.1% and away from home was up by 7.6%. Compared to the previous month, food prices were up 1.1%, the seventh consecutive monthly increase of 0.9% or more, mainly due to a rise in the cost of nonalcoholic beverages (2.3%), coffee (3.5%), dairy and related products (1.7%)

Housing Utilities

United States CPI Housing

Transportation

United States CPI Transportation

US Core CPI July 2022

United States Core Consumer Prices

Owners’ equivalent rent portion of CPI +5.8% y/y, fastest gain since September 1990 

Still fast growth in airfare with +28% y/y gain, but down from peak of +38% in May

The effects of the coronavirus pandemic, then the supply crisis and throw in the Russian invasion of Ukraine on top have been weighing on prices. Since last year many businesses closed and lockdowns were imposed, denting economic activity leaving the world vulnerable.  A jump in commodities and material costs, coupled with supply constraints, are pushing producer prices up and some companies are passing those costs to clients

“I’m making more money…But I don’t see it because I’m paying more money for stuff now.” Low-wage workers are getting sharp raises. Inflation is eating them up. via Greg Ip WSJ

 Source: BLS

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