Once Again, CPI Hotter Than Expected

  • Once again CPI disappointed markets with a hotter-than-expected read and that has sent Treasury yields higher once again.


  • The overall inflation rate rose 1.3% for the month which was above the 1.0% increase in May and higher than the 1.1% expected. The 1.3% is a new cycle high. The increase was broad-based but gas (11.2%), food (1.3%), and shelter prices (0.6%) were the primary culprits. The year-over-year rate rose to 9.1% vs. 8.6% in May and that too is a new cycle high and is the highest since November 1981.


  • The service sector continued to show strong price gains as it rose 0.9% after two straight months of 0.8% gains. This sector constitutes 60.13% of the overall index with housing taking a chunk of that at 42%. We speculated last month that with housing activity slowing, the housing component should start to see some moderation but it’s a lagging indicator in CPI so it won’t start to show for several more months and that seems to be the case as shelter costs rose 0.6% for the second straight month.


  • Ex-food and energy, the results were also disappointing with the core rate increasing 0.7% which was above the 0.5% expectation and the 0.6% print in June. It’s the highest monthly gain in a year.


  • The YoY core rate did dip to 5.9% from 6.0% but again that was above the 5.7% expectation. The YoY rate was helped by the June 2021 increase of 0.8% coming off the calculation. The next several months, however, will see much smaller rates roll off so continued improvement in the YoY core rate will prove difficult unless the 2022 levels start to decrease dramatically and that doesn’t seem to be in the cards.


  • This report continues the sticky inflation scenario as price increases were fairly broad and not isolated to individual sectors. Also, the sizeable increases that continue to persist in key areas (see gas, food and shelter this month) will prevent material improvement in the overall inflation reading.


  • This report is pushing up odds that the September meeting will be another 75bps hike following a 75bps hike this month. It will also add to chatter that this month’s hike could be of the very rare 100bps variety. The latest fed funds futures pricing has the December 2022 rate at 3.62%.


  • As expected, Treasury yields are higher across-the-board as the market prices in the increasing odds of more aggressive Fed rate hikes, and the persistence of higher levels of inflation.


Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.17 3.22 3.23 3.31 3.45 3.91
0.50 3.15 3.19 3.17 3.20 3.31 3.80
1.00 3.15 3.16 3.14 3.15 3.22 3.68
2.00 3.15 3.08 3.07 3.10 NA
3.00 3.02 3.04 NA
4.00 2.99 NA
5.00 2.96 NA
10.00 NA

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Published: 07/13/22 Author: Thomas R. Fitzgerald