US inflation roared again to a fresh four-decade high last month, likely strengthening the Federal Reserve’s resolve to aggressively raise interest rates that risks upending the economic expansion. The consumer price index rose 9.1% from a year earlier. Economists projected a 1.1% rise from May and an 8.8% year-over-year increase, based on the Bloomberg survey medians. This was the fourth-straight month that the headline annual figure topped estimates. The core CPI, which strips out the more volatile food and energy components, advanced 0.7% from the prior month and 5.9% from a year ago, above forecasts.
Federal Reserve officials are on track to raise interest rates by 75 basis points for the second straight month when they meet later in July after policymakers pushed back against a bigger move. Fed watch tool from CME Group indicating 85% for 100bps hike this month biggest since 1984.
The June CPI print is ugly across the board This is bad news for risk assets as it increases the likelihood that the Fed will keep raising rates rapidly and end up overshooting by enough to push the economy into recession. The higher and faster the Fed goes increases the risks for a potential US recession, which several economists see in the next 12 months.
Higher prices continue to eat away at consumer incomes, despite strong nominal wage gains. Inflation-adjusted average hourly earnings dropped 3.6% in June from a year earlier, the 15th straight decline and the largest in data back to 2007.
The value of overall retail purchases increased 1%, after an upwardly revised 0.1% decline in May, Commerce Department figures showed Friday. The figures aren’t adjusted for inflation. Padded by high savings and rising wages, American households are spending nearly as much money as they did earlier, but largely to keep up with higher prices, not to actually buy more stuff. The June retail sales data imply there’s still enough momentum for the US economy to grow during the rest of the year as consumers find ways to cope with surging inflation, whether by dipping into savings or switching jobs... Coming broadly in line with expectations, the sales data won’t change the Fed’s current case for a 75-basis-point rate hike later this month.
In nominal terms, US Retail Sales are still booming, hitting another all-time high in June with an increase of 7.7% over the last year. But after adjusting for inflation, the story changes. Real Retail Sales peaked in April 2021 and are down 1.2% YoY.
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The Fed has made it clear it is prepared to sacrifice growth as it desperately tries to get a grip on inflation via higher interest rates. This is also contributing to the strongest dollar in 20 years, which will hurt international competitiveness.
The 2-year Treasury yield popped Wednesday while its 10-year counterpart fell, pushing the so-called inversion between the two to its biggest level since 2000. Yield-curve inversions are seen by many on Wall Street as signals that a recession lies on the horizon.
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US GDP contracted in the first quarter and trackers of economic activity, such as the popular Atlanta Fed indicator GDPNow suggest it will do so again in the second quarter when data are released on July 28. However, apart from a possible negative GDP print, many indicators suggest the economy is still expanding.
Bank of America Corp. economists has joined Wells Fargo Investment Institute and Nomura Holdings Inc. in expecting a US recession in 2022. BofA forecasts a “mild” downturn, saying services spending is slowing and hot inflation is spurring consumers to pull back.
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