#USCoreCPIMissesExpectations

US Core CPI Undershoot Expectation: Disinflation Trend Carries On

US June inflation showed another month of moderation as core CPI accelerated to 2.7% YoY, coming in below consensus at 2.8% (vs. 2.9% prior month). Headline CPI had its first monthly negative printing since 2020, falling -0.1% MoM (YoY decelerated to 3.8% vs. 4.2% prior). The lower energy price in June was largely responsible for headline deflation.

Drilling Down and sticky inflation in underlying drivers

Headline inflation did ease substantially; nevertheless core services price inflation remains persistent. Strong housing and motor insurance costs continue to push up underlying price pressures well above the Fed’s 2% inflation target. It underscores the non-linear nature of this round of disinflation: cooling for goods and energy but not for services.

Market Reaction

Following the inflation print, the probability of a July Fed rate hike on the CME was edged down from 50%. The Treasury yield fell as traders reduced their bets for more of a do-more Fed. The focus shifted on how fast will Fed start cutting in late 2023.

Bullish implication: the less elevated inflation numbers would suggest an increased possibility for monetary policy relief in near term, potentially supporting stocks, crypto and other risk assets.

Bearish implication: sticky services inflation may suggest a more prudent Fed that would be more reluctant to ease, hence keep borrowing cost higher for longer.

Neutral implication: this one-off decrease in headline inflation does not promise that disinflation will accelerate to Fed’s target, as Fed said this on Friday – inflation trend has decelerated, Fed will depend on data and will continue to monitor closely on whether disinflation trend is entrenched.

Strategic Implication

June's CPI report does confirm disinflation trend for the US economy, yet it reiterates that the journey for inflation back to 2% would be a rather sluggish and non-linear one. Although the markets are factoring in more chance for easing in the following meetings, stubborn services inflation pressures will likely require the Fed to remain prudent. Selectively embracing the growth assets is advisable while closely watch any signs of this disinflation trend reversal.

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