U.S. Inflation Rose 0.1% In June, Slightly Lower Than Expected

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1% in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, headline inflation rose 2.9%, the highest year-over-year increase since February 2012.

The consensus estimate for headline inflation in June was 0.2%, so today’s number was a slight surprise lower. However, core inflation – which strips out food and energy – rose 0.2% in June, which matched expectations. Over the last 12 months, core inflation has increased 2.3%, above the Federal Reserve’s target of 2.0%.

A key factor in the June numbers was a 0.3% drop in the energy index, even though gasoline prices increased 0.5% and are up a robust 24.3% over the last year. The energy index was pulled down by declines in the costs of energy services (down 1.5%), electricity (down 1.4%) and piped gas services (down 1.7%).

Apparel prices also fell in June, down 0.9%. Food prices increased a moderate 0.2% and are up only 1.4% over the last year. Prices for used cars and trucks increased 0.7% after four consecutive months of declines.

Despite the small downside miss in overall inflation, there can be no doubt that inflation is on an upswing, hitting an annual rate of 2.9% for the first time in more than six years. Core inflation is also on the upswing, as this chart clearly shows:

What this means for TIPS and I Bonds

Holders of Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust the principal balances for TIPS and set the future inflation-adjusted variable rate for I Bonds.

For June, the BLS set the inflation index at 251.989, an increase of 0.16% over the May number. This means that principal balances on TIPS will increase 0.16% in August. Here are the new inflation indexes for all TIPS in August 2018.

For I Bonds, the June inflation number marks the midpoint of data that will be used to reset the I Bond’s variable rate on November 1. So far, from March to June 2018, non-seasonably adjusted inflation has increased 0.98%, which translates to a variable rate of 1.96%. But three months remain in the March to September rate-setting period.

Here is how the inflation numbers are progressing:

What this means for future interest rates

With core inflation currently running at 2.3%, the Federal Reserve would have no reason to back away from its current policy of gradually raising short-term interest rates. But today’s report shouldn’t raise alarms, either. So expect the status quo, with two more rate increases in 2018.

At any rate, an annual inflation rate of 2.9% – highest in more than six years – should squash any doubts that inflation is returning, and interest rates will have to follow those numbers higher.

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