The June inflation was quite the whopper, coming in at 9.1%, according to the latest Bureau of Labor Statistics (BLS) data. The market had penciled in a slightly higher-than-expected reading of 8.8%, but President Joe Biden and Federal Reserve Chair Jerome Powell’s monster reared its ugly head and gave everyone, from the investor class to low-income households, a fright. So, how bad was last month’s consumer price index (CPI)? Be afraid. Be very afraid.
June Inflation Paints a Grim Picture
The consumer price index (CPI) rose 1.3% on a month-over-month basis in June, topping economists’ expectations of 1.1%. The core inflation rate, which eliminates the volatile energy and food sectors, advanced to 5.9%, higher than the market consensus of 5.7%. The monthly core CPI also picked up at a higher-than-expected pace of 0.7%.
All of the BLS’ indexes were higher year-over-year to finish the second quarter:
- Food: +10.4%
- Energy: +41.6%
- New Vehicles: +11.4%
- Used Cars and Trucks: +7.1%
- Apparel: +5.2%
- Medical Care Commodities: +3.2%
- Shelter: +5.6%
- Transportation Services: +8.8%
- Medical Care Services: +4.8%
Within these broad measurements, most goods and services were more expensive in June. From bread (+10.8%) to chicken (+18.6%) to fuel oil (+98.5%) to indoor plants (+5.6%) to eyeglasses and eye care (+3.3%). So, once again, it was a broad-based report that confirmed inflation has become entrenched inside every crevice of the United States economy.
How the Markets Reacted
The financial markets cratered on the data in pre-market trading, as nearly every asset class declined, except for bonds and the greenback. The leading stock market benchmarks plummeted: the Dow Jones Industrial Average fell nearly 400 points, the S&P 500 dropped 1.6%, the Nasdaq Composite Index tumbled close to 300 points. The US Treasury market was up across the board, with the benchmark 10-year yield up more than ten basis points to 3.06%. The US Dollar Index (DXY), which measures the buck against a basket of currencies, spiked immediately after the headline reading, hitting 108.50.
Has Inflation Peaked?
The White House issued a July 12 memo that was a poor attempt at damage control. The document essentially noted that the latest CPI figures were “out of date” and “backwards-looking” since it did not feature the significant drop in food and energy prices. Indeed, it is correct since West Texas Intermediate (WTI) crude oil has fallen about 20%, while gasoline prices have dropped roughly 7% to $4.65 per gallon. Of course, the month is still young, and anything could happen to reverse these losses: China could dismantle its COVID Zero strategy, the Organization of the Petroleum Exporting Countries (OPEC) might freeze or cut output, refineries with poor infrastructure could go offline, and Russia may desire to troll global energy markets and slash production levels.
Still, the July CPI report is likely to be lower than the 9.1% headline. But, if the interest-rate futures market is anything to go by, there is one institution that does not think inflation has peaked: The Federal Reserve. Investors are beginning to pencil in a 100-basis-point hike to the benchmark Fed funds rate at the July Federal Open Market Committee (FOMC) policy meeting. The selloff in the equities arena suggested the same sentiment. If so, this could lead to severe hemorrhaging on Wall Street. There will be blood.
What about the recession? The Atlanta Fed Bank’s GDPNow model will certainly reflect the recent inflationary pressures, potentially adding to the negative growth rate in the gross domestic product. At this rate, Americans will be looking back at the 2001 dot-com crash and the 2008-2009 financial crisis with great nostalgia compared to what is happening today. Don’t worry, though. President Joe Biden will blame President Vladimir Putin and greedy corporations for the 3.3% boost in audio equipment or 10.2% increase in laundry and dry-cleaning services. Calling it “Putin’s price hike” or the soon-to-be “Putin’s recession” will certainly raise his approval rating.