As discussed earlier, inflation came in smoking hot today, with core CPI rising 0.88% mom in June, up from the 0.74% increase in May, and nearly double the expected 0.5% print. This resulted in the yoy rate surging to 4.47% yoy, more than double the Fed's inflation target, and up from 3.8%, which is the highest since November 1991. Headline inflation also rose 0.9% mom in June, with the % yoy rate climbing to 5.4% from 5.0%
Looking at the components, there were no surprises: as BofA's Alexander Lin writes in his CPI post-mortem, used cars and trucks "exploded" for another 10.5% mom, while new cars also rose an impressive 2.0% mom. In total, used cars accounted for one third of the gain in CPI.
Travel related components also saw outsized strength with lodging away from home spiking 7.0% mom and airline fares rising 2.7% mom. The latter supported a broader transportation services gain of 1.5% mom, which was also boosted by a 5.2% jump in car & truck rentals and a 1.2% rise in auto insurance.
Stickier OER stayed hot, rising 0.32% mom, with rent of primary residence somewhat lower at a still solid 0.23% mom. The OER pickup puts it back near the top of the range seen in the last business cycle.
The bottom line: while transitory drivers continue to boost core CPI by unprecedented numbers, persistent inflation - shelter and rent - is also strengthening at an alarming pace (as we discussed in May in "Goldman Warns Of "Substantial" Surge In Home Prices, Expects Bigger Housing Bubble Than 2007").
Next, looking on a contribution basis, new cars added 9bp to core CPI, used cars added 42bp, lodging added 9bp and transportation services added 10bp. Putting it all together, these components contributed 70bp to core CPI this month. As such, the rest of core accounted for 18bp, which in normal times would be a relatively healthy increase in prices. In other words, even without all the transitory strength, other components of inflation were solid—the aforementioned Owner-Equivalent Rent pickup likely being the primary driver.
This brings us to the $64 trillion question: how much of inflation is transitory and how much is permanent, or as BofA asks "to what extent will we continue to see transitory strength in core CPI?"
The good news is that after some stunning gains, some of the key "transitory" components have topped out. Consider the following:
- Lodging away from home is now 2% higher than Feb 2020 levels, which could mean much more limited upside going forward.
- Meanwhile, airline fares still have scope to rise as they remain 9.5% below prepandemic levels.
- On used cars, the ytd increase for CPI is now at 29%, which is now greater than the ytd increase in Manheim wholesale prices which were up 26% at its high in May and moderated to 24% in June.
As such, BofA believes this may be the end of used car price strength in CPI, versus the bank's previous belief that it could materialize over the next few months as retail lags wholesale. To the extent that wholesale prices continue to head lower, the bank's economists note that the US now faces a growing near term risk of negative payback in used cars, which could lead to more depressed core inflation prints. Indeed, as BofA found in a separate report published overnight, such negative payback scenarios could lead to substantial transitory disinflation over the next year that could bring broader core inflation below target, despite improving persistent inflation.
Finally, as to whether any of this data will impact the Fed's actions, BofA does not believe this report changes much. As BofA summarizes, "transitory price pressures remain rampant in the core inflation data and could be nearing their end, with risk of a negative payback over the next year. Persistent inflation, reflected largely by OER, has improved although it is not signaling troublesome inflation."
In conclusion, here are the heatmaps of sequential changes in CPI ...
... and annual changes: