U.S. June CPI: Persistent top-line inflation hits 9.1%

The past few years have been characterized by a series of economic shocks that have wreaked havoc with just about every area of the American economy. The most recent set of energy shocks has sent the top-line consumer price index to 9.1%, a four decade high, on the back of an 11.2% increase in gasoline prices and a 7.5% jump in overall energy prices, according to Labor Department data released Wednesday. Energy costs rose by 41.6% on a year-ago basis, while gasoline costs have advanced at a 60.6% rate. Perhaps more troubling than the top-line increases, though, is the inflation inside the housing sector, where costs increased by 7.3% on an annual basis. That’s well above the 5.9% core inflation rate, which implies that efforts to restore price stability will require the Federal Reserve to push the federal funds rate into restrictive terrain and keep it there for an uncomfortably long time. These increases have created the conditions where it is increasingly difficult to make the case that the economy will achieve anything resembling a soft landing. In our estimation, the June inflation data will prompt the Federal Reserve to raise its policy rate by 75 basis points at its next meeting on July 27. We anticipate another 125 basis points of rate hikes by the end of the year—putting the policy rate in a range between 3.25% and 3.5%—before the central bank considers any pause in its effort to restore price stability to ascertain the direction of growth, employment and inflation, if indeed the central bank is willing to take that risk. Given the 18% decline in oil prices and 7% drop in gasoline costs since the middle of June, the July data will provide some relief to top-line inflation. But the type of persistent inflation that we now observe will require sustained policy attention out of the Fed to restore price stability. It is important to note that price movements inside the owners’ equivalent rent series, which is the most critical component of the housing data, accounts for roughly one-third of the core CPI estimate. With that metric now advancing at a 5.5% rate, any thoughts about a near-term pause in the Fed’s efforts to restore price stability is wishful thinking. In addition, risks to the outlook linked to the global price movements in energy suggest that declaring a peak in inflation is a fool’s errand. While the price of oil has declined on easing global demand, it would not take much to cause a reversal and send those prices back up and inflation higher with it.

The data

Overall inflation increased by 1.3% on the month and by 9.1% on a year-ago basis, while core pricing excluding food and gasoline increased by 0.7% in June and by 5.9% on a year-over-year basis. The primary catalyst for that increase was the 7.5% rise in the energy sector. Service costs increased by 0.9% and were up by 6.2% from a year ago. The housing complex experienced an increase of 0.8% in June, while shelter costs rose by 0.6% and the policy sensitive owners’ equivalent rent series advanced by 0.7%. On a year-ago basis, costs increased by 7.3%, 5.6% and 5.5%, respectively. Food and beverage costs increased by 1% on the month and by 10% from a year ago, while apparel prices increased by 0.8% and by 5.2% over the same time frames. Food costs increased by 10.4% over the past year. Transportation costs increased by 3.8%, new vehicle prices advanced by 0.7%, used truck and car costs jumped by 1.6% while airline fares declined by 1.8%, all in June. Medical costs increased by 0.7% in June and were up by 4.5% over the past year.

The takeaway

Inflation continues to broaden out with price increases inside the core implying that it will require strong and sustained policy action out of the Federal Reserve, and that will carry the risk of sending the economy into recession early next year. In our estimation, there is a 45% probability of a recession over the next 12 months as the economy absorbs another 200 basis-point increase in the policy rate.