US CPI explodes higher in June: Can Powell placate policymakers?
Matt Weller, CFA, CMT July 13, 2021 2:04 PM
The growing risk is that rising prices become psychologically entrenched among US consumers...
This morning’s data just made Jerome Powell’s week much more difficult.
The Chairman of the Federal Reserve, along with his colleagues, has consistently argued that any elevated inflation readings coming out of the COVID recession would be merely “transitory” as supply chains and shortages worked their way through the system. And while technically he could still be right, it doesn’t mean this week’s testimony to an uneasy Congress will be any easier.
Both the headline and “core” (excluding food and energy) CPI reports for June showed consumer prices rose at 0.9% m/m, crushing expectations of a 0.5% and 0.4% m/m rise respectively. Following this morning’s release, the year-over-year headline US inflation rate is now 5.4%, the highest reading in nearly 13 years; meanwhile, the core CPI reading is up 4.5% y/y, its highest reading in 30 years!
Digging into the numbers, we’re seeing the same theme driving prices higher: Sectors that were particularly influenced by the shutdown – including used car prices, air fares and transportation costs – are driving the bulk of the move. Indeed, used car and truck prices surged another 10.5% accounting for more than a third of the overall rise in the CPI index.
As automakers finally start to secure new chips and ramp up production, the supply of vehicles on the market should start to ease, and other industries should eventually be able to work through their own disruptions as well. However, the risk is that rising prices become psychologically entrenched among US consumers, encouraging them to spend more aggressively and exacerbating the very inflationary prices they’re concerned about in the first place. To wit, according to a New York Fed survey released Monday, consumers see prices overall up 4.8% in the next 12 months, among the higher readings in decades.
Markets are still digesting the data as we go to press, but the biggest moves so far suggest traders are preparing for potentially earlier and more aggressive rate hikes from the Fed. The short-term 2-year Treasury yield shot up a quick 3bps to 0.26%, near its highest level since the COVID recession, and the US dollar has rallied 40-50 pips against all of its major rivals as well. Not surprisingly, commodities that are priced in US dollars, including gold and oil, are seeing a kneejerk reaction lower.
Looking at GBP/USD, rates have rolled over after approaching the 50-day EMA near 1.3900 yesterday. With US inflationary pressures still accelerating, bearish traders may look to push the pair down toward last week’s lows in the mid-1.3700s or even the six-month lows (and 200-day EMA) near 1.3700 as the week proceeds:
Source: StoneX, TradingView
How to trade with FOREX.com
Follow these easy steps to start trading with FOREX.com today:
- Open a Forex.com account, or log-in if you’re already a customer.
- Search for the pair you want to trade in our award-winning platform.
- Choose your position and size, and your stop and limit levels.
- Place the trade.
Disclaimer: StoneX Financial Ltd (trading as "Forex.com") is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, Forex.com does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by Forex.com or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although Forex.com is not specifically prevented from dealing before providing this material, Forex.com does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
For further details see our full non-independent research disclaimer and quarterly summary.