US: Upward pressure on core goods prices is an unwelcome development for the Fed – Wells Fargo

The US Consumer Price Index rose in June by 9.1% compared to the previous year, the highest rate since 1981. The number was above the 8.6% reading of market consensus. The drivers behind the upside miss were broad-based and mostly in the "core" components, explained analysts at Wells Fargo. According to them, it will take at least several consecutive monthly inflation readings of slowing price growth for the Federal Reserve to believe that it has inflation in check.

Key Quotes: 

“The June CPI was expected to be hot, but today's report downright burns. Consumer price inflation came in ahead of what were already lofty expectations, increasing 1.3%. Year-over-year, prices are up a scorching 9.1% which marks yet another new cycle-high. Disturbingly for the Fed, the beat can largely be tied to greater strength in core inflation.”

“The resilient upward pressure on core goods prices over the past two months is an unwelcome development for the Federal Reserve. Easing core goods inflation was supposed to be the lone port in the storm in the second quarter amid surging food and energy prices and core services inflation that keeps marching higher.”

“The Fed was already worried about inflation becoming entrenched, hence the super-sized 75 bps rate hike in June. Today's report is likely to further fan those fears. If the choice set for the Fed's next move remains between a 50 or 75 bps rate hike, 75 bps is the clear pick. However, with inflation getting even further offsides, the Fed may be looking at third option at its upcoming meeting: a 100 bps hike. To be clear, a 100 bps rate hike is not our base case at present, but yet another surprisingly strong CPI report cracks the door to such a move should the FOMC decide to bang that door wide open.”