HIGHLIGHTS:
- Today’s release for June headline inflation showed consumer prices increased by 9.1 percent, compared to the 8.8 percent expectation.
- The market reaction was fairly muted this time around, though investors are betting on stronger action from the Fed.
- Excluding food and energy, inflation has actually been tracking downward over the last three months.
- Officials may be considering a historic 1.00 percent rate hike at the Fed’s meeting later this month.
If you remember your Greek mythology from high school, Sisyphus was a king who Zeus punished for cheating death too many times. He was forced to roll a boulder up a hill, only to have it roll back down each time he approached the summit. In current markets, that boulder can be thought of as inflation, and Sisyphus as the Federal Reserve.
The boulder has rolled back again. The eagerly awaited June inflation report is in, with headline numbers exceeding the already lofty estimates. The Consumer Price Index rose at a monthly rate of 1.3 percent, driving the annualized print up to 9.1 percent—slightly above the expected 8.8 percent. Inflation numbers continue to reflect an environment not seen since the early 1980s. In fact, if we were using the same methods of tracking inflation they did 41 years ago, this would have been the highest number since the 1970s. While markets had a strong reaction to the May release, it seems investors were a little more prepared for a surprise this time around. Stock markets were mostly unchanged following the release, while bond markets fluctuated. The 2-year Treasury yield climbed above 3 percent; conversely, the 10-year yield fell to 2.9 percent. Yield curve inversion—specifically when the 2-year Treasury yields more than its 10-year counterpart—is considered a potential signal for looming recession. However, that reversal needs to be sustained for some time, and a recession may occur months, or even years, after the inversion.
Looking under the hood, the inflation news doesn’t seem as grim. The core reading—which excludes more volatile food and energy prices—came in at a 5.9 percent annualized rate. That reading actually reflects a downward trend in the gauge over the past three months. Individual components of inflation reveal that housing continued to be a major pain point for consumer prices. Other factors, such as airfares and cars, have leveled off in recent months. Given that the headline reading includes costs like energy, there may be a glimmer of hope that the next reading should reflect the 10 percent decline in gasoline prices. All this indicates that we could finally see a peak in headline inflation in the coming months.
As investors head into the second-quarter earnings season, corporate health and earnings growth seem to be remaining intact—though we expect earnings expectations to decelerate over the coming year. Additionally, consumers—the driving force of the US economy—continue to have their own healthy balance sheets as well, due to a strong employment picture. The Federal Reserve will need to take all of this into account at its meeting at the end of July, where a historic 1.00 percent rate hike may be on the table.
Did Sisyphus ever get his boulder to the summit and over the hill? Some modern-day philosophers argue he eventually did. Markets are looking to see if the Fed can balance rising inflation remedies without ruining what has actually been a solid economy. This would represent getting the boulder over the summit.
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