2 key takeaways after the June US CPI report

The main economic event of the trading week is behind us now that the US June inflation report was released yesterday. Inflation keeps rising in the United States and the rest of the world, leading to expectations that central banks must do more to fight the rise in the prices of goods and services.

Inflation in the United States kept rising in June. It reached 9.1%, levels not seen since November 1981.

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Moreover, core inflation, which excludes energy and food prices, keeps rising too. As such, the market’s expectations that the Federal Reserve will hike the rates more aggressively have increased dramatically.

After the inflation report, here are two key takeaways to consider:

• Headline CPI posted its largest post-pandemic monthly gain
• The market prices a 50% chance of a 100bp rate hike from the Fed

The largest post-pandemic monthly gain for headline CPI

One of the conclusions of June inflation report is that the prices of goods and services keep rising. Moreover, the increase in June is the largest in the post-pandemic period, leading to fears that more of the same is around the corner.

The headline CPI rose 1.3% in June, the highest level in over four decades. Moreover, price pressures were broad-based, with many sectors experiencing their largest monthly advance in decades. For example, rent costs advance is the largest since 1985.

Such developments led to the market raising the bets that the Fed would hike by more than 75bp in July.

50% chance that the Fed will hike by 100bp in July

Markets reacted immediately to the June inflation report and adjusted their expectations of a rate hike from the Fed. Before the report, the discussion was centered on whether the Fed will hike by 50bp or 75bp in July.

But the rise in the core CPI data puts the Fed under pressure to do even more. As such, there is now a 50% chance the Fed will deliver an unprecedented 100bp rate hike in July.

Is this out of the question? Not necessarily.

One central bank already did it – the Bank of Canada. It was expected to raise the rates by 75bp yesterday but decided to frontload and hike by one full percentage point.

To sum up, the Fed might be more aggressive in raising rates than the markets priced in so far. Because of that, the US dollar should find bids on every pullback.