Inflationistas received their latest sign on Tuesday that the US economy is overheating and inflation may not be so transitory after all.
Consumer prices rose 0.9% between May and June, said the Bureau of Labor Statistics showed.
This was much higher than economists at Bloomberg were predicting; they had estimated that prices would rise by just 0.5%. But Tuesday’s reading marked the highest one-month change in 13 years, since June 2008.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
The consumer price index (CPI) rose 5.4% in June, the fastest pace since August 2008. That was also higher than the 5% rise in May and also beat economists’ predictions of a 4.9% rise.
Excluding volatile components such as energy and food, core CPI jumped to 4.5% in June year-on-year, surpassing the 3.8% reading in May.
Why is US inflation so high?
Market watchers have long been scrutinising US inflation figures for signs of whether the Federal Reserve – the US central bank – will gradually begin to reduce the extraordinary stimulus measures it took during the pandemic and trillions of dollars’ worth of stimulus it has pumped to help the economy survive the pandemic.
After spending months insisting that it will not raise interest rates until 2023, the Fed changed course and stunned markets last month when it raised its inflation forecast and conceded that we may see some interest rate rises by the end of 2023
A third of the rise in CPI last month came from a surge in second-hand vehicle prices, which rose by 10.5% in June compared to May.
The higher prices were also evident in used airline fares, hotel room rates and many other sectors that were hit hardest by the pandemic.
“The June CPI report showed that everything is getting more expensive for the US consumer… Wall Street reacted strongly to a hotter than expected CPI data that sent short-end Treasury yields higher,” said Edward Moya, chief market analyst at OANDA.
All eyes will now be on Fed chair Jerome Powell’s testimony on Thursday and Friday when he is due to appear on Capitol Hill and give an update on the future state of monetary policy.
Tuesday’s reading also makes it harder for Powell to advocate that looser monetary policies still need to remain in place.
US stocks fell at their open after the inflation data was released.
The strong reading raises odds of an earlier tapering
Tuesday’s strong inflation reading also raises the odds that the Fed may make a taper announcement –effectively indicating when it may start rolling back $120bn of bond purchases – at the Jackson Hole Symposium in August.
“A lot of this still looks transitory, but if prices continue to stay elevated, the Fed will have to concede that parts of the surge prices will be transitory,” adds Moya.
Ben Laidler, global markets strategist at multi-asset investment platform eToro, says June’s figures may reverse a sharp decline in both inflation expectations and ten-year yields as the market anticipates an earlier loosening by the Fed.
“We may also see renewed interest in more cyclical and deep-value sectors, such as financials and commodities, at the expense of the high-flying tech sector,” adds Laidler.
So hate it, loathe it, accept it or deny it, inflation is creeping up. So the best thing for investors to do is to inflation proof their portfolios.
Saloni is a web writer for MoneyWeek focusing on personal finance and global financial markets. Her work has appeared in FTAdviser (part of the Financial Times), Business Insider and City A.M, among other publications. She holds a masters in international journalism from City, University of London.
Follow her on Twitter at @sardana_saloni
Bitcoin hits new heights - is now a good time to invest?
The value of Bitcoin has surged to a 20-month high. Why is Bitcoin rising and is now a good time to invest?
By Vaishali Varu Published
Gold hits record high - could it soar higher next year?
The yellow metal has hit a new all-time high. We look at market expectations for 2024, whether investors should sell and take profits, and how to invest in gold.
By Ruth Emery Published
UK wages grow at a record pace
The latest UK wages data will add pressure on the BoE to push interest rates even higher.
By Nicole García Mérida Published
Trapped in a time of zombie government
It’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
By Max King Published
America is in deep denial over debt
The downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
By Alex Rankine Published
UK economy avoids stagnation with surprise growth
Gross domestic product increased by 0.2% in the second quarter and by 0.5% in June
By Pedro Gonçalves Published
Bank of England raises interest rates to 5.25%
The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
By Ruth Emery Published
UK wage growth hits a record high
Stubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
By Vaishali Varu Published
UK inflation remains at 8.7% ‒ what it means for your money
Inflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
By John Fitzsimons Published
VICE bankruptcy: how did it happen?
Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
By Jane Lewis Published