CPI In-Line With Expectations: Great News For The Bulls

Inflation Increases Because Of Easy Comparisons

After the PPI-FD report beat estimates, some bulls were worried that the June CPI report would also beat estimates. The fact that it was mostly in line with estimates is a big win for the bulls because it means the Fed won’t raise rates a 5th time this year. Currently, there is a 52.9% chance the Fed raises rates 4 times in 2018 and a 2.7% chance it raises rates 5 times.

It seems very unlikely that a 5th hike will occur, but that chance would have been much higher if CPI beat the consensus. I think year over year inflation will be mitigated in Q4 by the tougher year over year comparisons. That could push the Fed closer to hiking 3 times, but obviously, year over year comps aren’t the only factor which affects inflation.

Month over month CPI was up 0.1% which missed estimates for 0.2%. As you can see in the chart below, year over year headline CPI was up 2.9% which met the consensus estimate and was 0.1% higher than last month. The comparison was easy as you can see from the green arrow. CPI was only up 1.6% in June 2017. In September 2017, CPI was 2.2%, which means the comparison will get much tougher.

Core CPI was up 0.2% month over month which met estimates and was the same as last month. Core CPI was up 2.3% year over year which beat the consensus and last month’s report by 0.1%. The scaling in the chart below underrepresents the major change year over year comparisons will undergo in the next 9 months. June 2017 core CPI was up 1.7%. March 2018 core CPI was up 2.1%. Starting in January 2019, the comparisons will be tough. The easiest one is August which had 1.7% core inflation in 2017.

(Click on image to enlarge)

CPI Details

Let’s look at the specifics of the report. Medical expenses were up 0.4% month over month and 2.5% year over year. The chart below shows the month over month change in healthcare in the PPI and PCE reports. The PPI selected healthcare industries prices were negative but less so than the previous report. The PCE healthcare services inflation was low in May. We will get the PCE report for June in 2.5 weeks. I expect core PCE inflation will be above the 2% target which was hit last month, but it won’t cause the Fed to act because of its symmetrical policy. Anything at 2.5% or higher would be disconcerting, but that’s highly unlikely to occur. Vehicle prices were up 0.4% and used vehicle prices were up 0.7%. This is near the PPI report’s numbers.

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