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The core-consumer prices index saw the biggest gain since January 2018 in June with 2.1% gain vs. 2% expected. The data indicates rising inflation pressures, although the Federal Reserve is still considered likely to implement rate cuts this month.

Key Takeaways

• The core-consumer price index, which excludes the volatile components of food and energy, rose 2.1% annually vs. 2% expected and 2% in May.
• The overall CPI rose 1.6% vs. 1.8% last month, and this was in line with expectations.
• The gains in CPI were driven by increases in the costs of use cars, apparel, and furniture as well as rents and healthcare to a lesser degree. 

Overall CPI came in at 0.1% for the month of June, muted by a 3.6% drop in the cost of gasoline. Food prices saw no change after a 0.3% increase in May, and food consumed at home dropped 0.2%. The cost of clothing rose 1.1%, and the cost of used cars and trucks rebounded 1.6% after four months of decline. Household furnishings rose 0.8%, the biggest gain since 1991, with lawn care services on the rise, and rents and healthcare both rose 0.3%.

US inflation pressure may be on the rise, although this is unlikely to affect Fed monetary policy. It’s too soon to say whether the data in the recent report released by the Labor Department on Thursday is anomalous or trend-setting, and the central bank is still likely to cut interest rates this month to mitigate potential economic headwinds such as trade protectionism and sub-expectation inflation pressure. 

The Fed has missed its 2% target range of inflation for this year, recently downgrading expectations to 1.5% inflation which is measured by the core-PCE. Fed Chairman Jerome Powell said on Wednesday that there is a “risk that weak inflation will be even more persistent than we currently anticipate”. He also vowed to “act as appropriate” regarding any difficulties posing a threat to the US economy. The Fed will meet on July 30 to discuss monetary policy and inflation.

Lol, second-strongest MoM core CPI print this cycle, Fed gotta cut. pic.twitter.com/IRJQ17gMsn

— George Pearkes (@pearkes) July 11, 2019

Expert Outlook

Avery Shenfeld, senior economist at CIBC Capital Markets, pointed out that the Fed has had a big miss on inflation projections despite the recent increase.

“Powell's fairly clear leaning to cutting rates now (from yesterday's testimony) still signals a quarter point cut this month, with today's firmer core reading just one more reason why a 50 bp cut in July is much more unlikely,” he said. “While the Fed has spoken about the risks of a more persistent downside miss to its inflation target as a reason to ease, we believe those risks are tied to their worry that a sustained growth slump is coming, and doesn't rest as much on the existing gap between inflation and the 2% target.”

Market Reaction

Gold prices have risen on the day with a 0.25% increase in spot gold which last traded at $1,413.68/oz following a high of $1,425.81/oz and a low of $1,409.78/oz. Gold faced some selling pressure following the news but remains above critical support at $1,400.