The consumer price index came in just hotter than expected in June, as the CPI inflation rate eclipsed May's 40-year peak. Following the CPI report, Dow Jones industrial average futures pointed to a sharply lower open on expectations for further aggressive Federal Reserve tightening.
The CPI rose 1.3% from the prior month and 9.1% from a year ago, compared to an inflation rate of 8.6% in May. The core CPI, which strips out volatile food and energy categories, rose 0.7% from May. Still, the annual core inflation rate eased to 5.9% from the prior month's 6% reading. March's 6.5% core inflation rate was the highest since August 1982.
Economists expected the overall CPI to rise 1.1% on the month, pushing the annual CPI inflation rate to 8.8%. The core CPI was seen rising 0.5% vs. May and 5.8% from a year ago.
Inflation may finally be past its peak, with gas prices pulling back from record highs in mid-June. But that didn't show up in June consumer price index data, which is collected throughout the month.
Goods Vs. Services Inflation
In cycles past, the Fed has put more emphasis on core inflation, which can provide a better indication of underlying price pressures amid volatility in energy prices. However, with inflation running at a four-decade high, Fed officials worry that expectations for high inflation will become self-reinforcing. That means workers pushing for bigger pay raises and companies becoming less hesitant about raising prices.
Inflation in goods prices, excluding food and energy, has decelerated from double-digit increases earlier in the year. Core goods prices rose 0.8% on the month, bringing the annual inflation rate down to 7.2% from 8.5% in May.
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However, inflation in nonenergy services prices, which affects 57% of consumer budgets, has yet to subside, rising 0.7% on the month and 5.5% from a year ago. That topped April's 30-year high of 5.2%. Nonenergy services includes big categories such as rent and medical services, where price increases reflect the strong labor market more than inflationary supply disruptions.
The 0.7% monthly rise in the core consumer price index, if sustained, would add up to a 8.4% annual core inflation rate. That compares to Federal Reserve projections of 4.3% core inflation in 2022. If inflation stays on pace to exceed projected Fed levels, policymakers probably will have to tighten further and faster than expected.
Keep in mind that the CPI differs from the Fed's preferred personal consumption expenditures price index. The latter includes government purchases on behalf of consumers such as by Medicare and Medicaid. It also factors in a substitution effect, when high prices lead consumers to adapt purchasing behavior.
