Inflation was back in focus yesterday (13 July 2021) following the release of US CPI inflation data for June. From a headline perspective, the US CPI inflation reading of 5.4%, for the year to June, came in above expectations of 4.9% and the May reading of 5%. The elevated reading gained a lot of media attention, however, the response from equity markets, bond yields and currencies was much more muted.
Looking at the underlying data in detail, the June CPI report showed that a small handful of categories, which are sensitive to the reopening of the economy, continued to dominate the pricing pressures – as we discussed last month (please see here).
With the economy reopening, the continued recovery in travel resulted in airfares rising 2.7% in June, whilst hotel room rates jumped 7.0% and used vehicle prices surged by a record 10.5% (accounting for around a third of the headline increase). At the same time, categories that aren’t associated with an economic reopening continued to paint a more benign inflation picture.
This explains the muted response from investment markets and bolsters our view that the current elevated level of headline inflation won’t have much bearing on economic growth or monetary policy, as it remains a consequence of pent up demand and supply chain congestion, both of which, we believe are temporary and will quickly fade.
Later today, the Fed Chair Jerome Powell will be testifying on US monetary policy and the state of the US economy. We expect he will reiterate that price pressures in the US are largely transitory in nature and also highlight that inflation is coming from categories that are directly affected by the reopening of the economy.
The UK also released inflation data this morning, coming in at 2.5% versus estimates of 2.2%. Whilst not of the same magnitude of that seen in the US, the drivers behind the reading remain the same.
Still to come this week we have US Producer prices inflation, US retail sales for June and an update on interest rate policy from the Bank of Japan.
Peter Quayle, Fund Manager