U.S. inflation surprised with a CPI increase of 9.1% in June, versus the 8.8% expected by analysts’ consensus, representing a new record since November 1981, and the rise in the core inflation index worries analysts as recession looms.
Energy continues to be a key driver of overall inflation as fuel oil rose sharply. However, the core inflation figure at 5.9% is also quite solid and above economists’ forecast of 5.7%, says an AXA IM report accessed by Funds Society.
While energy and food contributed significantly (7.5% and 1%, respectively), price increases were broad-based, say the fund manager’s experts.
The underlying CPI rose by 0.7% and was also higher than the Bloomberg consensus forecast of 0.5%. The categories that rose the most were transportation services +2.1%, used cars and trucks +1.6% and clothing +0.8%. Components that tend to be more durable, such as housing and medical care, continued the upward trend of recent months with +0.7%. Within the core components of the basket, only airfares fell -1.8% after rising 12.6% last month; hotels also declined. These two components appear to have softened, but should be supported in the coming months as the summer vacations begin.
Nominal rates rose following this stronger than expected inflation figure and inflation breakevens rose. With inflation surprising to the upside, the Fed may be forced to tighten the aggressiveness of its monetary policy, increasing the likelihood of a stagflation scenario.
Under this backdrop, AXA IM continues to favor exposure to inflation-linked bonds, as indexation will remain elevated and continues to surprise to the upside, providing inflation-linked bonds with a solid rate of return.
“Elevated indexation should also cushion against interest rate increases. We have also taken advantage of the increase in long maturity real rates to add duration to portfolios as the risk of a recession increases,” the report said.
On the other hand, PIMCO says that for the Fed, this inflation data amounts to “a five-alarm fire”.
Core inflation appears broadly entrenched across all goods and services and, as a result, we raise our core CPI inflation forecast, and now expect core CPI inflation to end 2022 at 5.5%, the manager’s report says.
“At a minimum, we expect the FOMC to announce another 75 basis point hike in July and September, and a 100 basis point hike is now also likely. Today’s data will increase the confidence of Fed officials that tight monetary policy is appropriate,” the experts say.
In addition, Wednesday’s inflation reading “should also increase the odds of recession, which we now estimate is likely sooner rather than later and possibly more severe.”
Por Magdalena MartÃnez