CPI: Came in softer than expected. Soft enough to make people start saying this could almost definitely be the end of the hiking after July. We don’t think it’s a definite and will say why in a minute. First some highlights.
Key takeaways from BOA:
The June CPI report was softer-than-expected as both headline and core CPI rose by 0.2% m/m.
A decline in used car prices contributed to the softer print, but there were broad signs of disinflation.
Despite the softer-than-expected print, recent data keep us confident that the Fed will raise rates by 25bp in July.
More at bottom
The weak core CPI reading for June is likely the start of a string of readings over the next few months that will show core inflation running closer to the Fed’s 2% target.
Nick Timiraos of the WSJ:
The June CPI report probably won't alter the Fed's planned July hike but it reduces the prospect of that second hike Most officials penciled in two more increases last month but did so on the assumption that inflation would decline more slowly
Top 5 CPI Contributors via BBG/ZH
Services Inflation is a Pig in a Python
Services inflation did drop finally, due to rents backing off. This is a lagging indicator, but very real.
June Rent inflation 7.83% YoY, down from 8.04% and lowest since Dec '22 June Shelter inflation 8.33% YoY, down from 8.66% and lowest since Nov '22
Shelter was still the largest contributor to the monthly CPI increase, accounting for over 70% of the increase. But it is just starting to drop and should be lower as it lags real time data significantly. The potential problem however, as ZH notes, is that real time indicators, which can admittedly be noisy, have turned up once again.
Used cars are dropping, which is goods inflation. But now the cost to service them and insure them (services inflation) is up double digits1.
It is almost comical. Now that people have bought used cars, they have to insure and fix them. Covid repurcussions continue to work their way through the economy like a pig in a python.
Overall the data was what the doctor ordered for a healthy market reaction.
