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US: Inflation surges in June

Thu, Jul 17 2008, 08:14 GMT
by KBC Market Research Desk

KBC Bank

The June CPI report disappointed, as it showed that inflationary pressures remain ubiquitous. The headline CPI surged higher by 1.1% M/M and 5% Y/Y, largely exceeding expectations for a 0.7% M/M. It is the largest increase since May 1991. Energy rose a strong 6.6% M/M (24.7% Y/Y), but also food up 0.7% M/M (5.2% Y/Y) contributed to the steep rise in headline inflation. Core CPI, which excludes energy and food, was up 0.3% M/M and 2.4% Y/Y following 2.3% Y/Y previously. Core CPI behaved better in the past year, but didn’t decline either, which is disappointing given the slow growth in previous quarters. In the core CPI, housing costs increased 0.5% M/M (3.5% Y/Y) for the second month in a row. Besides transportation (3.8% M/M) and tobacco (1.5% M/M), also education costs (0.5% M/m) increased strongly. The report confirms Bernanke’s concerns at his testimony that upside inflation risks remain important, even as the Fed expects that slower growth translates in lower inflation pressures in 2009/10.

June industrial production topped expectations as it rose by 0.5% M/M following a 0.2% M/M drop in May. Expectations were for a more modest 0.1% M/M. The upward surprise was due to the weather-related utility output that jumped 2.1% M/M. The more important cyclical manufacturing output rose 0.2% M/M after a 0.1% M/M drop in May and is down 0.6% Y/Y, which also exceeded expectations, as a sharp decline in aggregate hours worked for the month suggested a weaker outcome. The third monthly Y/Y decline nevertheless shows that conditions in the sector remain challenging. Mining was up 1.1% M/M.

The NAHB survey on building sentiment showed a further worsening of homebuilders’ sentiment. The headline index dropped another 2 points in July to a new alltime low of only 16. It was the third consecutive drop and the deterioration was broadly based and touched all three sub-indices (current & future sales and traffic). The survey suggests that there are no signs of a bottoming in the housing sector.

Other: Deterioration UK labour market keeps wage growth limited

In the UK, the labour market showed further signs of deterioration, as the jobless claims rose for the fifth month in a row by 15.5K in June, the highest monthly increase since the early 90s. At the same time, earnings growth remained fairly subdued. As such, it appears so far that the deterioration of the labour market will prevent employees from securing large wage increases. This should reassure the Bank of England that the current spike in inflation will remain temporary and that it won’t have to raise rates to quell inflation, which could throw the UK economy into a severe recession.

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Published on  Thu, Jul 17 2008, 08:28 GMT

Archive

• US: Employment data mixed before payrolls
  Published On Fri, Sep 5 2008, 07:29 GMT
• US: Factory orders in line with durables
  Published On Thu, Sep 4 2008, 07:27 GMT
• US: Manufacturing sector stabilizes
  Published On Wed, Sep 3 2008, 07:29 GMT
• EMU: Italian wage growth accelerates
  Published On Tue, Sep 2 2008, 07:30 GMT
• US: Chicago PMI jumps higher
  Published On Mon, Sep 1 2008, 07:38 GMT

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