US: CPI report unlikely to sway Fed officials in their thinking on inflation

Data released on Wednesday showed a larger than expected increase in inflation during June. Analysts at Wells Fargo point out price gains continued to be tied to a few relatively small categories, but there is increasing evidence that inflation is broadening out beyond categories at the center of the reopening. They see the numbers won’t change Federal Reserve’s thinking on inflation.

Key Quotes:

“The Consumer Price Index (CPI) surged 0.9% as the costs of fully reopening an economy continue to mount. Over the past year, inflation is up 5.4%, a feat made all the more impressive by base effects beginning to get harder after prices first started to rebound last June.”

“Despite the larger-than-expected gain in prices, today's report is unlikely to sway Fed officials in their thinking on inflation. Outsized gains tied to relatively small components continue to support the view that the current degree of inflation is transitory, but with price pressures broadening out, questions continue to swirl around when and to what extent inflation will eventually settle down.”

“Along with consumer inflation expectations having turned around, the disinflationary forces of the past decade fading and the Fed's greater tolerance of inflation under its new framework, the underlying trend in inflation has moved up in our view. We look for the Consumer Price Index to recede only to about 2.5% by the end of next year, with the core index remaining above the high-water mark of the past cycle.”

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