Core Blimey!
US core inflation surprised to the downside again in June, rising 0.2%mom, marking the fifth straight below forecast reading. The year-over-year reading rose in line with forecasts of 2.9%. Declining prices for new and used vehicles helped offset rises in tariff-impacted categories such as apparel, furniture, and appliances.
However, beneath the headline figures, underlying inflationary pressures are emerging. For the first time since February, all major CPI components, namely core goods, core services, food, and energy, posted monthly increases. Tariff-related cost pressures are clearly feeding through, especially in electronics and clothing, with core goods prices (excluding vehicles) jumping 0.55%, the sharpest monthly rise in over three years. While many retailers have so far shielded consumers by relying on inventories built up earlier in the year, dwindling stock levels suggest broader price hikes may be on the horizon as summer progresses.
In the services sector, prices excluding energy rose 0.3%mom. While shelter costs, including hotel rates, eased slightly, discretionary categories such as airfares and hospitality continued to weaken, highlighting consumer caution amid a softening labour market and slowing wage growth. Real average hourly earnings growth declined to 1.0% annually—the lowest level since early 2025.
Notably, “supercore” inflation, which excludes both housing and energy from services, ticked higher, rising above 3%yoy for the first time since February. This evolving inflation picture presents growing risks for markets. Despite the reassuring headline figures, fading consumer pricing power and rising input costs threaten profit margins, especially in discretionary retail and travel sectors.
While the Fed is expected to remain cautious in the near term, stubborn services inflation, growing tariff pressures, and political headwinds from the presidential administration are likely to add further strain. At the same time, softening consumer sentiment may limit companies' ability to pass on rising costs, leaving margins increasingly exposed. As a result, upcoming retail sales data, and corporate earnings and forecasts will be closely scrutinised for any signs of stress.
Closer to home, UK inflation unexpectedly rose to 3.6% in June, its highest level since January 2024, primarily driven by a 4.4% increase in food prices, the highest since February 2024. Retailers are pointing fingers at recent payroll tax increases and minimum wage hikes, which came into effect in April, as key factors pushing up their operating costs and consumer prices.
The Bank of England's strategy of gradually cutting interest rates, after a period of aggressive tightening, faces a significant challenge from the latest inflation figures, particularly an anticipated cut on August 7th. While the UK economy shows signs of weakening, which would typically support lower rates to stimulate growth, persistent inflation above the BoE's 2% target creates a dilemma for the Monetary Policy Committee.
As per Bloomberg’s Quote of the Day yesterday:
“Inflation is always and everywhere a monetary phenomenon.” – Dr. Milton Friedman
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