Pace of US inflation picks up again in test for Fed

The breakneck pace of US consumer price increases seen since the start of the year accelerated in June, which could challenge the Federal Reserve’s case that the burst of inflationary pressures accompanying the economic reopening will prove temporary.

The consumer price index rose last month at the fastest pace since August 2008, up 5.4 per cent from the previous year. That is well above the 5 per cent rise reported in May and the 4.9 per cent increase that economists had forecast.

On a monthly basis, data released by the Bureau of Labor Statistics showed price gains of 0.9 per cent, the biggest one-month jump since June 2008.

Stripping out volatile items like food and energy, “core” CPI rose from 3.8 per cent in May relative to the year before to 4.5 per cent in June.

Investors, economists and policymakers have scrutinised incoming inflation figures amid a fierce debate about the risk of runaway consumer prices fuelled by ultra-accommodative fiscal and monetary policy.

Price jumps have so far been most significant for sectors directly affected by the coronavirus pandemic. Travel-related expenses, such as airfares, have soared, while a semiconductor shortage has contributed to a jump in used car prices. 

One-third of the rise in the CPI last month stemmed from a record jump in previously-owned vehicle prices, according to the Bureau of Labor Statistics, which appreciated 10.5 per cent in June from the previous month.

The US central bank has long characterised elevated inflation prints as “transitory”, which will fade as Covid-19 lockdowns ease further and supply catches up with pent-up demand. Joe Biden’s administration shares this view, and a White House official expressed confidence that inflationary pressures would soon abate.

Market measures of inflation expectations also reflect ebbing concerns about runaway consumer prices, with long-dated metrics running below their short-term counterparts. But some investors warn that higher inflation could persist for longer than many anticipate.

“Most of the increase in the monthly metrics still look related to massive supply-demand imbalances in categories that were ‘closed’ in 2020: used cars, hotel rooms, travel costs, and so forth,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott. “Supply will eventually normalise in these categories, but it could take longer than common sense suggests, meaning that somewhat elevated inflation prints could last until 2022.”

US government bonds pared back recent gains after Tuesday’s release, sending yields higher from the recent lows seen since the Fed’s meeting on monetary policy in June, which raised the prospect of a quicker withdrawal of accommodation than initially expected.

The benchmark 10-year note traded 0.02 percentage points higher before settling around 1.38 per cent.