The Consumer Price Index (CPI) Increased 0.5% in June

 
Implications: A surge in gasoline led consumer prices higher in June, generating the largest monthly gain in the overall CPI since February. Gasoline, up 6.3% in June, accounted for roughly two-thirds of the overall 0.5% monthly gain for the consumer price index. The "core" CPI, which excludes food and energy, increased 0.2% in June, exactly as the consensus expected. The gain in the core CPI was led by rent (both actual rent and owners' equivalent rent) as well as medical care. Compared to a year ago, overall consumer prices are up 1.8% while core prices are up 1.6%. Neither of these figures sets off alarm bells. Instead, they suggest the Federal Reserve's preferred measure of inflation, the PCE deflator (which usually runs a ΒΌ point below the CPI) will remain below the Fed's target of 2%. We don't expect this to last. Inflation probably bottomed in April when it was up only 1.1% from the prior year, and will be noticeably higher a year from now. However, for the Fed, the key measure of inflation is its own forecast of future inflation. So, even if inflation goes to roughly 3% in 2014, as long as the Fed projects the rise to be temporary it will not react to that inflation alone by raising short-term interest rates. The Fed is more focused on the labor market and, we believe, is willing to let inflation exceed its long-term target of 2% for a prolonged period of time in order to get the unemployment rate down. The worst news in today's report was that "real" (inflation-adjusted) average hourly earnings were flat in June, although they are still up 0.4% in the past year. Given today's news it looks like "real" (inflation-adjusted) consumer spending grew at a 1.3% annual rate in Q2, consistent with our forecast of 1.5% real GDP growth.

Click here for a PDF version
Posted on Tuesday, July 16, 2013 @ 10:29 AM

These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.