U.S. CPI: Judging the June Inflation Jump | Lord Abbett
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Economic Insights

A look at the larger-than-expected rise in U.S. consumer inflation--and the potential implications for U.S. Federal Reserve policy and interest rates

Read time: 1 minute

Price pressures associated with the U.S. economic reopening, including supply chain frictions in the motor vehicle sector, have been much greater than expected, as evidenced by the larger than forecast 0.9% increase in the headline U.S. consumer price index (CPI) in June. But we think this won’t necessarily translate into higher inflation unless it results in rising inflation expectations and wage demands amid a tight U.S. labor market.

The June CPI data, released by the U.S. Bureau of Labor Statistics on July 13, also showed a 0.9% increase in the core rate of inflation, which excludes food and energy prices. The monthly CPI figures were much greater than expected because of large price increases for everything associated with motor vehicles and goods prices more broadly. But despite falling prices for medical services, a result of an oddity in how the CPI computes the price of health insurance, core services inflation is also accelerating. The most worrisome issue, in our view, is increasing rents, as very low vacancy rates promise to prolong an accelerating trend.

Implications for Fed Policy and Interest Rates

While there is evidence of increasing inflation expectations in consumer surveys, financial market indicators have not confirmed the increases yet. The latter may be because investors believe that, despite the U.S. Federal Reserve’s (Fed) new Flexible Average Inflation Targeting (FAIT) framework, the Fed will move early to quash any incipient increase in expectations that threatens its 2% inflation target.

We believe the Fed is going to find it difficult to prolong the current period of full-blown monetary accommodation for much longer unless it starts to emphasize expectations much more heavily in gauging the likelihood of inflation persisting above its target. Given the risk of large price increases during reopening triggering the start of an inflationary loop into expectations and wages, the Fed will be under pressure to accelerate tightening even more than it did after its June policy meeting. We think the end result likely would be a flatter yield curve as the market continues to believe the Fed will not allow inflation to rise sharply.

 

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

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Glossary Definitions

The U.S. Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

Yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. One such comparison involves the two-year and 10-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

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