US June CPI data rose much more than expected. Both the headline and core data surprised to the upside.
US inflation data for June surprised markets, reaching 5.4% year-over-year, much higher than the expected 4.9%. Gasoline, fuel oil, used car and truck prices have increased sharply.
Suddenly, the Fed is under intense pressure to act, while we cannot say the same for the European Central Bank or the Bank of Japan. Therefore, the ball is now in the Fed’s court as market participants turn their attention to today’s Fed chair Powell’s testimony due later in the North American session.
The Reopening Is Pushing Up Prices for Travel and Tourism
Investors expected the monthly CPI to increase by 0.5% and the core CPI by 0.4% in June. But the reality showed that inflation is running hotter than expected, with both measures rising by 0.9%. The prices of used cars and trucks increased by 10.5% over the month, following a 7.3% rise in May and 10% in April.
Various factors contributed to the rise in the CPI, such as the reopening of the US economy that is pushing up prices for travel and tourism. Airline fares, for example, rose 2.7% in June.
Another explanation besides the rise in national mobility is that the high prices have squeezed first-time buyers. Also, wages are up in some lower-paid industries.
One thing for sure is that inflation doesn’t look transitory anymore. The much higher inflation has led to a stronger US dollar as investors have rushed to buy the greenback on expectations that the Fed will act sooner rather than later. As such, the EUR/USD exchange rate dropped below 1.18 once again after last week’s attempt.
Fed chair Powell’s semi-annual testimony starts today, and with inflation running so hot, he will have a tough job explaining why the Fed expects it to be transitory.