A June inflation surprise

United States' CPI surprised to the downside in June. But why?

• The June CPI print was the first meaningful downside inflation surprise since the pandemic—with all re-opening related items, those most volatile, printing negative, helping push core below 2% annualised;

• But underlying inflation, after removing volatile items, also improved—showing steady disinflation over the quarter.

• There is some way to go before inflation returns to target, however.

Consumer Price Inflation (CPI) in the United States provided the first clear downside surprise since the pandemic this month as the June Core print fell below 2%MoM (annualised) for the first time since Feb. 2021.

To three decimal places, Core CPI printed +0.1576%MoM seasonally adjusted (rounded up to 0.2%MoM, or about 1.9% annualised.)

The good news needs to be tempered somewhat, however.

The weak monthly reading coincided with negative reading from all of the re-opening related volatile items. For example, used cars and trucks (-0.45%MoM), hotels (-2.34%MoM), airfares (-8.11%MoM) as well as medical services (-0.02%MoM) all dragged down core.

Used cars and trucks are likely to have further negative prints in coming months suggestive of a summer of low core CPI readings. But the Fed will look through such volatile items to the structural inflation.

Underlying core

Once we strip out “volatile” items the inflation news remains constructive, but requires caution.

That is, services and durable goods ex. volatile items and housing show steady but less-pronounced disinflation. 

Removing used cars and trucks from durables, we see negative inflation over 3-months at -5.3%3MA while services ex. housing, medical services, airfares and hotels slowed to +5.2%3MA—down from 7.4%3MA only 3 months ago.

Since the latter has a larger weight (roughly 80% of the basket) this implies underlying core CPI is still about 3.1%3MA—down from 7.3%3MA in March.

Adjusted durables remain volatile, of course, but over 3 months are now close to typical pre-pandemic lows. Services remain elevated, about 2ppts above pre-pandemic norms.

What happens next?

Overall, the Fed can be encouraged by the disinflation of underlying core inflation—though the reading is still well above 2%.

There may be two risks ahead. The first would be if durables goods begin to show even sharper deflation, perhaps portending more general price pressures. The second is if service inflation becomes entrenched at current levels—lower than a year ago, but well above a rate consistent with the Fed’s target.

The content in this piece is partly based on proprietary analysis that Exante Data does for institutional clients as part of its full macro strategy and flow analytics services. The content offered here differs significantly from Exante Data’s full service and is less technical as it aims to provide a more medium-term policy relevant perspective. The opinions and analytics expressed in this piece are those of the author alone and may not be those of Exante Data Inc. or Exante Advisors LLC. The content of this piece and the opinions expressed herein are independent of any work Exante Data Inc. or Exante Advisors LLC does and communicates to its clients.

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