Both headline CPI and the core rose .9% m/o/m, well more than the estimate of up .5% and .4% respectively. We are seeing a reacceleration in service price inflation now combined with aggressive goods price inflation. Versus last year where the easy comp thing is rolling off, the headline gain was 5.4% and the core rise was 4.5%. Energy prices jumped 1.5% m/o/m and food prices were higher by .8% m/o/m. Comparing headline CPI for June 2021 vs June 2019, they are up 6%. As for the core rate, it is higher by 5.7%. So forget about the Fed’s 2% target, we are now essentially running at a 3% annualized CPI rate ex food and energy.
With respect to services, ex energy prices rose .4% m/o/m and are running at a 5.1% annualized rate over the past 4 months. While Apartment List said rent growth was 2.3% in June from May, the BLS said it was just .2% while Owners’ Equivalent Rent was higher by .3%. Thus, expect a real pick up in the quarters to come in rent inflation for those that think this is just temporary. As Americans hit the road with the reopening, motor vehicle insurance prices jumped 1.2% m/o/m after a .7% gain in May and a 2.5% spike in April. They are up 11.3% y/o/y. Airfares rebounded by 2.7% and are higher by 25% y/o/y. Hotel price spiked by 7% m/o/m and are up 15% y/o/y. Medical care kept a lid on things with prices down by .1% m/o/m and up just .4% y/o/y because of declines in prescription drugs. Healthcare services though saw price gains in the month across the board.
Core goods prices jumped 2.2% m/o/m after a 1.8% rise in May and 2% increase in April and are now up 8.7% y/o/y. Used car prices led the way with a 10.5% monthly increase alone in June. Used car prices likely have topped but off obviously very high levels as they are up 45% y/o/y. New car prices rose by 2% in June after a 1.6% gain in May. They are now up 5.3% y/o/y. Most things related to the home like major appliances, floor coverings, window coverings, furniture/bedding, bedroom furniture and laundry equipment also saw sharp price gains in the month. Apparel prices, as we are finally shopping again, rose .7% m/o/m after a 1.2% increase in May.
Bottom line, core CPI is now running at an annualized pace of 8.4% in the past 4 months and I argue that the price increases being passed on to the rest of us is really only beginning. Rental increases will continue to drive higher service prices and goods price increases will last all thru at least this year and I believe well into 2022. I’ll repeat again, service inflation is NEVER temporary outside of 100 yr pandemics so the direction of goods prices is the only relevant variable to the overall inflation equation.
With respect to the Fed, any government official likes to have a plan and act on their own timing. Inflation stats like this that are not stopping, will throw the Fed’s plans out the window. I repeat my expectations of a July FOMC meeting announcement that tapering will begin in September. How can it not with inflation prints like this?
Inflation expectations in the TIPS market are jumping in response. The 5 yr breakeven is higher by 6 bps to 2.57% and is at a 5 week high. The 10 yr breakeven is higher by 2.5 bps to 2.36%.
CORE CPI m/o/m
CORE CPI y/o/y
CORE GOODS PRICES y/o/y