June CPI Data — Tom Lee CPI Call Comes True

June CPI Data — Tom Lee CPI Call Comes True

by

Morgan stanley, Wells Fargo, Bank of America, bear case

JUNE CPI RESULTS: Here are the quick bullet points. Scroll down for more or read more here.

  • +0.2% vs. +0.3% expected and +0.1% in May.
  • Y/Y, +3.0% vs. +3.1% expected and +4.0% prior.
  • Core CPI: +0.2% vs. +0.3% expected and +0.4% prior.
  • Y/Y, +4.8% vs. +5.0% expected and +5.3% prior.

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Inflation took a breather in June, hitting its lowest annual rate in over two years. This was partly due to a slowdown in costs and a favorable comparison to a period when prices were skyrocketing at a 40-year high. That’s a big score for Tom Lee, who accurately predicted this outcome earlier in the week — and the stock market action that followed.

The consumer price index (CPI) climbed 3% compared to the previous year, marking its lowest level since March 2021. On a monthly basis, the broad index, which tracks the prices of various goods and services, saw a modest 0.2% increase.

These figures undershot the expectations of experts, who predicted a 3.1% annual increase and a 0.3% monthly rise, according to Dow Jones estimates.

If we exclude the volatile food and energy prices, the core CPI rose by 4.8% compared to the previous year, with a marginal 0.2% monthly increase. This was a cooler-than-expected surprise as well, with the consensus estimates at a 5% annual increase and a 0.3% monthly rise.

In short, these numbers provide some breathing room for the Federal Reserve’s efforts to rein in inflation. It’s worth noting that inflation was hovering around a staggering 9% annual rate at this time last year, the highest since November 1981.

George Mateyo, Chief Investment Officer at Key Private Bank, commented on the report, stating, “There has been significant progress made on the inflation front, and today’s report confirmed that while most of the country is dealing with hotter temperatures outside, inflation is finally cooling. The Fed will embrace this report as validation that their policies are having the desired effect – inflation has fallen while growth has not yet stalled.”

However, central bank policymakers tend to focus more on core inflation, which still remains well above the Fed’s target of 2% annually. Despite this report, Mateyo believes it is unlikely to prevent the central bank from raising interest rates later this month.

The Fed anticipates that the inflation rate will continue to decline, particularly as costs associated with shelter ease. Shelter accounts for about one-third of the weighting in the CPI. However, the shelter index rose 0.4% last month and experienced a 7.8% annual increase. The Bureau of Labor Statistics highlighted that this monthly gain accounted for about 70% of the overall increase in the headline CPI.

Lisa Sturtevant, Chief Economist at Bright MLS, emphasized, “Housing costs, which account for a large share of the inflation picture, are not coming down meaningfully. Because rates had been pushed so low by the Fed during the pandemic and then increased so quickly, the Federal Reserve’s rate increases not only reduced housing demand — as intended — but also severely limited supply by locking homeowners into homes they would have otherwise listed for sale.”

The stock market responded positively to the report, as futures linked to the Dow Jones Industrial Average rose nearly 200 points. Treasury yields declined across the board.

Traders are still factoring in a strong possibility of a quarter percentage point rate hike by the Fed when it meets on July 25-26. However, market pricing indicates that this could be the last increase as officials take a pause to allow the previous hikes to have an impact on the economy.

The muted increase in the headline CPI occurred even as energy prices rose 0.6% during the month. However, the energy index dropped by 16.7% compared to the previous year, a period when gasoline prices at the pump were hovering around $5 per gallon.

Food prices saw a slight 0.1% increase on the month, while used vehicle prices, a key driver of the earlier surge in inflation in 2022, declined by 0.5%.

Airline fares fell by 3% on the month and are now down 8.1% compared to the previous year.

The easing of the CPI provided a boost to worker paychecks. Real average hourly earnings, adjusted for inflation, rose 0.2% from May to June and increased 1.2% on a year-over-year basis. During the peak of the inflation surge last June, worker wages consistently lagged behind the rising cost of living.

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