U.S. Inflation Rose 0.1% In June, Higher Than Expected

Includes: TIP, VTIP
by: Tipswatch

The monthly "headline" inflation number and core inflation for the month and year all came in higher than the consensus forecasts.

Overall U.S. inflation is being held down by declining gasoline prices, but core inflation is running at 2.1%, which is clearly "moderate" inflation.

The Federal Reserve probably won't be swayed by these numbers, and will remain on track to begin lowering short-term interest rates this year.

The Consumer Price Index for All Urban Consumers increased 0.1% in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, "headline" inflation increased 1.6%.

Although the 0.1% number doesn't indicate brisk inflation, it was higher than the consensus estimate of 0.0% and matched the increase in May. The 12-month number of 1.6% matched the consensus estimate.

Core inflation, which removes food and energy, was up a surprising 0.3% in June, its largest monthly increase since January 2018. This topped the consensus estimate of 0.2%. It is now up 2.1% over the last 12 months, also exceeding the consensus estimate of 2.0%.

These numbers, which show inflation running a little stronger than expected, come amid near market certainty that the Federal Reserve will begin cutting short-term interest rates in July. Today's data could cause minor stock market jitters, but at this point, at 8:40 a.m. EDT, stock futures remain positive.

The June report was an interesting mix. Increases in the indexes for shelter, apparel, and used cars and trucks more than offset declines in energy indexes to result in the month's 0.1% increase.

  • Shelter costs rose 0.3% and are up 3.5% over a year.
  • Apparel costs rose a strong 1.1%, but remain down 1.3% over a year.
  • Prices of used cars and trucks rose 1.6%, but are up only 1.2% over a year.
  • The energy index fell 2.3% for the month, led by a 3.6% decline in the price of gasoline, which is now down 5.4% over the last year.

Also, food prices were unchanged in June and are up 1.6% over the last year.

The June increase continues a trend of core inflation running stronger than the headline all-items index. This indicates that overall inflation has been strongly influenced by declining gas prices, but otherwise "moderate inflation" continues for the U.S. economy as a whole.

Here is the 12-month trend for headline and core inflation, showing the trend of relatively stable core inflation versus the more volatile all-items index, which has dipped with gas prices this year:

12-month U.S. inflation Source: Bureau of Labor Statistics

What this means for TIPS and I Bonds

Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances on TIPS and set future interest rates for I Bonds. For June, the BLS set the inflation index at 256.143, a minuscule increase of 0.02% over the May number.

For TIPS. Today's inflation report means that the principal balances of all TIPS will be adjusted 0.02% higher in August, after a 0.21% increase in July and 0.53% increase in June. Here are the new August inflation indexes for all TIPS.

For I Bonds. The June number marks the halfway point of the March to September inflation period that will set the I Bond's new inflation-adjusted variable rate, which goes into effect on November 1. So far, inflation is up 0.76% for this period, which translates to a new variable rate of 1.52%, already higher than the current 1.40%. However, three months remain, and summer inflation is notoriously unpredictable.

Here are the numbers:

Inflation and I Bonds

What this means for future interest rates

Although today's inflation numbers came in higher than expected, there's nothing shocking enough here to change the Federal Reserve's track toward lower short-term interest rates. Stock futures remain higher this morning, indicating the market still trusts a rate cut is coming.

But with core inflation running at 2.1%, would the Fed be more likely to go with a 25 basis point cut, instead of 50 basis points, which some have been expecting? I'm in the 25-basis-point contingent, because it will let the Fed send an "easing" signal while giving it future flexibility.

Investment advice? One-year bank CDs paying 2.5% or higher are attractive as we head toward rate cuts. For five-year CDs, anything paying 3.0% is worth considering.

In general, TIPS mutual funds will have a positive reaction to Federal Reserve easing -- meaning TIPS yields will decline -- because of the double effect of 1) lower interest rates and 2) fears that too much stimulus will spark a surge in inflation. However, a lot of this effect has already been priced in, with the TIP ETF up 6% so far in 2019.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he recommends can purchased through the Treasury or other providers without fees, commissions or carrying charges.