US CPI Sees Yield Curve Inversion

On Wednesday afternoon (GMT+3), the US Consumer Price Index (CPI) figures for June were released, showing that consumer prices grew by 9.1% year-on-year, the fastest pace of inflation growth since November 1981. This is higher than the forecast of 8.8% and May’s figure of 8.6%. Meanwhile, Core CPI increased 0.7% month-on-month, higher than analyst estimates and the previous month’s value of 0.6%.

The Core CPI figure – which excludes volatile goods like oil and food – growing in line with the CPI shows a broadening range of price pressures from across sectors. Says Robert Frick, corporate economist at Navy Federal Credit Union. “Though CPI’s spike is led by energy and food prices, which are largely global problems, prices continue to mount for domestic goods and services, from shelter to autos to apparel.”

In the month, energy prices increased 7.5%; food 1%; shelter 0.6% electricity 1.7%; gasoline 11.2%; medical care 0.7%; and new and used vehicles 0.7% and 1.6% respectively. 

Post-Market

Markets are now expecting that higher-than-expected CPI numbers will mean continued, or even more aggressive hikes from the Fed, whose primary tool for fighting inflation has been the raising of interest rates. 

The US dollar, which has recently rallied to its highest in almost 20 years, is up over 4% in the past month. While the Dollar Index dipped at the release of inflation numbers to the $107.5 level, it has since rebounded back to the $108 range seen for much of Tuesday and Wednesday.

Meanwhile, the US Treasury yield curve saw its largest inversion since 2000, with the 2-year note surging to 3.138% and the 10-year note sliding to 2.919%. An inversion of the yield curve is seen to be a sign of an impending recession – Bank of America analysts say they expect a “mild” one this year. At the same time, gold dipped towards the $1700 level before rebounding, and is now trading at the $1730 range.

Equities also slid at the news – although it seems like the markets have largely priced in outsized inflation. The S&P 500 dropped 0.5%, the Nasdaq was down 0.1%, and DJIA lost 0.7% at the end of the trading day. 

Analysts now forecast a 23% chance that the Fed will hike rates by 1% or 100 basis points in its coming interest rate decision, which will be released on 27 July at 21:00 (GMT+3). 

Investors are now advised to pay close attention to the upcoming month-on-month figures for the Producer Price Index (PPI), which will be released on Thursday, 14 July, at 15:30 (GMT+3). Like the CPI, the PPI is a leading measure of inflation, but measures cost from the seller’s point of view and does not include imports. 

As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.