CPI inflation declined in June; Dow Jones collapses on Fed expectations

CPI came in higher than expected in June, The CPI inflation rate crossed its 40-year peak in May. After the CPI report, the Dow Jones Industrial Average opened sharply lower on expectations of further aggressive tightening by the Federal Reserve.


The CPI rose 1.3% from the previous month and 9.1% from a year ago, compared to an inflation rate of 8.6% in May. Core CPI, which strips out volatile food and energy categories, rose 0.7% from May. However, the annual core inflation rate eased to 5.9% from the previous month’s reading of 6%. Core inflation of 6.5% in March was the highest since August 1982.

Economists expected the overall CPI to rise 1.1% during the month, pushing the annual CPI inflation rate to 8.8%. Core CPI saw an increase of 0.5% versus May and 5.8% YoY.

Inflation may finally be past its peak, with gas prices retreating from record highs in mid-June. But that was not shown in June’s CPI data, which was collected throughout the month.

goods vs. Service inflation

In previous sessions, the Fed has focused more on core inflation, which can provide a better indication of core price pressures amid fluctuations in energy prices. However, with inflation soaring to its highest level in four decades, Federal Reserve officials are concerned that expectations for higher inflation will reinforce themselves. This means that workers are pushing for larger wage increases and companies are becoming less hesitant about raising prices.

Inflation in commodity prices, excluding food and energy, slowed from double-digit increases earlier in the year. Commodity prices rose 0.8% month over month, bringing the annual inflation rate down to 7.2% from 8.5% in May.

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However, inflation in prices for non-energy services, which affects 57% of consumers’ budgets, has not yet subsided, rising 0.7% in the month and 5.5% from a year ago. That surpassed a 30-year high of 5.2%. Non-energy services include large categories such as rent and medical services, where price increases reflect labor market strength more than inflationary disruptions to supplies.

A 0.7% monthly rise in core CPI, if continued, would add up to 8.4% of the annual core inflation rate. This compares with the Fed’s forecast for core inflation of 4.3% in 2022. If inflation continues to exceed the Fed’s projected levels, policy makers will likely have to tighten more and faster than anticipated.

Keep in mind that the CPI is different from the Fed’s preferred PCE price index. The latter includes government purchases on behalf of consumers such as Medicare and Medicaid. They also influence the substitution effect, when higher prices cause consumers to adapt buying behaviour.

Dow Jones, Treasury yields reaction to CPI inflation

The Dow was down 1.1% early Wednesday stock market work. The S&P 500 is down 1.3% and the Nasdaq Composite is down 1.6%.

The Dow has suffered three modest losses in a row since Friday’s jobs report. The Dow was down 0.15% on Friday, 0.4% on Tuesday and 0.6% on Tuesday. Meanwhile, the Nasdaq Composite Index, after closing at a one-month high on Friday, came under more pressure. The Nasdaq fell 2.3 percent on Monday and 0.95 percent 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 is down 20.4% from its peak close, and is back in bear market territory with Tuesday’s down 0.9%. The Nasdaq is down 29.85%.

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The stock market has been oscillating recently between relief that the brush with a recession is fast approaching, which could lead to an early termination of interest rate hikes by the Fed, and concern that the Fed will remain aggressive. Sentiment is now tilting towards an extended period of Fed tightening, after last week’s stronger-than-expected jobs report.

Be sure to read IBD’s The Big Picture A column after each trading day for the latest information on the prevailing stock market trend and what that means for your trading decisions.

The 10-year Treasury yield rose 7 basis points to 3.03% after the CPI report. The two-year Treasury yield jumped 15 basis points to 3.20%. An inversion of the Treasury yield curve, with short-term rates higher than long-term rates, is often a precursor to recession.

CME مجموعة group FedWatch page It shows that markets are pricing in a 75 basis point rate hike on July 27, but there is a strong chance of a full percentage point move. Markets now see another rise of 75 basis points likely on September 21st, versus previous possibilities for a move of half a point.

CPI Inflation Report Details

Used car and truck prices are up 1.6% month over month, up 7.1% from a year ago. However, used car inflation has fallen sharply from a peak annual gain of 35.3% in March.

Demand for used cars got a boost amid a global chip shortage that has hampered production of new cars. New car prices rose 0.7% during the month, while they were up 11.4% from a year ago. The annual rise of 13.2% in April was the largest annual increase since 1949.

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Energy prices are up 7.5% during the month and are up 41.6% from a year ago. However, the average national gasoline price has fallen about 7.5% since mid-June, according to the AAA.

Food prices outside the home rose 0.9% in June versus May, while they were up 7.7% from a year ago. Prices of food consumed at home increased by 1% last month and 12.2% from a year ago.

Prices for medical services increased 0.7% month over month, bringing the annual increase to 4.8%.

Meanwhile, home prices rose 0.6% in June, as owners’ equivalent rents rose 0.7%.

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