The consumer price index came in hotter than expected in June, as the CPI inflation rate eclipsed May's 40-year peak. Following the CPI report, the Dow Jones industrial average came off session lows but fell for a fourth-straight session amid expectations for further aggressive Federal Reserve tightening.
The CPI rose 1.3% from the prior month and 9.1% from a year ago, compared to an inflation rate of 8.6% in May. The core CPI, which strips out volatile food and energy categories, rose 0.7% from May. Still, the annual core inflation rate eased to 5.9% from the prior month's 6% reading. March's 6.5% core inflation rate was the highest since August 1982.
Economists expected the overall CPI to rise 1.1% on the month, pushing the annual CPI inflation rate to 8.8%. The core CPI was seen rising 0.5% vs. May and 5.8% from a year ago.
Inflation may finally be past its peak, with gas prices pulling back from record highs in mid-June. But that didn't show up in June consumer price index data, which is collected throughout the month.
Goods Vs. Services Inflation
In cycles past, the Fed has put more emphasis on core inflation, which can provide a better indication of underlying price pressures amid volatility in energy prices. However, with inflation running at a four-decade high, Fed officials worry that expectations for high inflation will become self-reinforcing. That means workers pushing for bigger pay raises and companies becoming less hesitant about raising prices.
Inflation in goods prices, excluding food and energy, has decelerated from double-digit increases earlier in the year. Core goods prices rose 0.8% on the month, bringing the annual inflation rate down to 7.2% from 8.5% in May.
However, inflation in nonenergy services prices, which affects 57% of consumer budgets, has yet to subside, rising 0.7% on the month and 5.5% from a year ago. That topped April's 30-year high of 5.2%. Nonenergy services includes big categories such as rent and medical services, where price increases reflect the strong labor market more than inflationary supply disruptions.
The 0.7% monthly rise in the core consumer price index, if sustained, would add up to a 8.4% annual core inflation rate. That compares to Federal Reserve projections of 4.3% core inflation in 2022. If inflation stays on pace to exceed projected Fed levels, policymakers probably will have to tighten further and faster than expected.
Keep in mind that the CPI differs from the Fed's preferred personal consumption expenditures price index. The latter includes government purchases on behalf of consumers such as by Medicare and Medicaid. It also factors in a substitution effect, when high prices lead consumers to adapt purchasing behavior.
Dow Jones, Treasury Yields Reaction To CPI Inflation Rate
The Dow Jones slipped 0.7% in Wednesday stock market action. The S&P 500 lost 0.5% and the Nasdaq 0.15%.
The Dow Jones has now racked up four straight moderate losses since Friday's jobs report. The Dow pulled back 0.15% on Friday, 0.4% on Tuesday and 0.6% on Tuesday. Meanwhile, the Nasdaq composite, after closing at a one-month high on Friday, has come under more pressure. The Nasdaq slid 2.3% on Monday and 0.95% on Tuesday.
As of Tuesday's close, the Dow was down 15.8% from its all-time closing high on Jan. 4. The S&P 500 has fallen 20.4% from its peak close, returning to bear market territory with Tuesday's 0.9% decline. The Nasdaq has tumbled 29.85%.
The stock market has recently been oscillating between relief that a brush with recession is fast approaching, which could bring an early end to Fed rate hikes, and worry that the Fed will have to remain aggressive. Sentiment is now leaning toward an extended period of Fed tightening, following last week's stronger-than-expected jobs report and the CPI. But there's also a sense that the Fed will tighten too far, too fast.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
The 10-year Treasury yield initially rose above 3% before backtracking to 2.91% as aggressive Fed tightening dims growth prospects. The 2-year Treasury yield rose 8 basis points to 3.13%. The Treasury yield curve inversion, with short-term rates above long-term rates, is often a precursor of recession.
The CME Group FedWatch page shows markets are pricing in better-than-even odds of a 100-basis-point rate hike on July 27. Markets now see another 75-basis-point hike as likely on Sept. 21.
CPI Inflation Report Details
Prices for used cars and trucks rose 1.6% on the month, and rose 7.1% from a year ago. However, used car inflation has come down sharply from a peak 35.3% annual gain in March.
Demand for used cars got a boost amid the global chip shortage that snagged production for new autos. Prices for new vehicles increased 0.7% on the month, while rising 11.4% from a year ago. April's 13.2% annual rise was the biggest yearly increase since 1949.
Energy prices rose 7.5% on the month and increased 41.6% from a year ago. However, the average national gasoline price has come down about 7.5% since mid-June, according to AAA.
Prices for food away from home rose 0.9% in June vs. May, while rising 7.7% from a year ago. Prices for food consumed at home climbed 1% last month and 12.2% from a year ago.
Prices for medical services rose 0.7% on the month, bringing the year-over-year increase to 4.8%.
Meanwhile, shelter prices rose 0.6% in June, as owners' equivalent rent rose 0.7%.
