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US Inflation Shows Fed Has More to Do
June US inflation came in at 1.3%MoM/9.1% YoY for headline and 0.7%MoM/5.9% for core. Both readings are 0.2pp higher than the consensus was expecting and should all but confirm a 75bp hike on July 27th following the firm June jobs print. This is the fastest rate of headline inflation since November 1981 with the only crumb of comfort being that it didn’t come in as high as the fake report doing the rounds yesterday suggesting a 10% headline reading.
While the core rate did at least slow from 6% to 5.9%, there is not much here that will relieve the pressure on the Federal Reserve to do more to get a grip on inflation. Food prices rose another 1% month-on-month (10% year-on-year), gasoline was up 11.2% MoM (59.9% YoY) while shelter, the biggest component of CPI with a weight of 32%, is up 0.6% MoM. There were also upside surprises from apparel (+0.8% MoM) and used cars (+1.6%), which we thought might have actually dipped marginally. The only major component to see a fall was airline fares (-1.8%), but this does follow three consecutive months of double-digit monthly rises.
We are hopeful that this marks the peak for headline inflation, especially with gasoline prices down around 5% from their June peak, but we can’t rule out another supply shock. In any case we suspect the descent will be slow given the ongoing upward pressure on food prices and the long time it takes for turning points in house price appreciation to feed through into the shelter components of CPI. There is still a lot of pent-up demand in the economy, especially around leisure, hospitality and tourism, as people appear prepared to run down accumulated savings and pay higher prices to do things they missed out on over the past couple of years. Hence why service sector inflation is looking so strong right now.
Pressure on RBA Following Aussie Unemployment Drop
Unemployment rate falling to new all-time low heaps pressure on the Reserve Bank of Australia (RBA) to "go large" with upcoming rate hikes
In the accompanying statement to its 5 July Monetary policy meeting, the RBA noted that "...The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market".
2Q22 inflation is due on 27 July, but in the meantime, this latest labour data suggests that the RBA will not be able to drop back to the 25bp hikes it started this cycle with, and may even have to consider hikes above 50bp.
A drop in the unemployment rate was expected this month, but not of the magnitude recorded. The previous all-time low was 3.8%, so a drop to 3.5% really does look quite alarmingly tight.
On the employment side of the report, the gains were also higher than expected. An 88,400 gain in employment was mainly (52,900) driven by full-time jobs, which implies a greater impact on disposable incomes than part-time jobs (p-t jobs rose 35,500). But part-time jobs often convert to full-time jobs, so we certainly are not ruling out their relevance for the outlook for wages growth and inflation.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.