Merk Investments: Consumer Price Index

The consumer price index for the month of July increased 0.8% m/m and 5.6% y/y, both well above the market consensus of 0.4% and 5.1%. The core also climbed well above expectations posting a 0.3% m/m and a 2.5% increase. Ex food consumer costs jumped 0.8% m/m and 5.5% y/y. Ex-energy costs increased 0.4% m/m and 3.0% y/y.

Inside the data the cost of housing increased 0.6% m/m and 3.9% y/y. The owner’s equivalent rent climbed modestly at a 0.1% m/m and 2.6% rate. Food was up 0.9%, fuel and utilities 3.3%, apparel 1.2%, transportation 1.7%, medical care 0.1%, recreation 0.4%, education 6.1% and other goods and services 0.4%. The only component that saw a price decline during the month of July was personal computers, which declined -1.0%.

The temptation of many market participants will be to dismiss this number as the peak in headline inflation. However, the pricing pressure in the core continues to advance well beyond market expectations and look to continue for the foreseeable future. The market and to a certain extent the Fed, is gambling that the recent moderation in the cost of oil will continue. We think that it may prove transitory and the risks to inflation continue to be to the upside. This data cannot provide much comfort to a Fed that has to be hearing from its corporate contacts that prices that held steady last year are now rising. Once the liquidity that the Fed has pumped into the system begins to take hold, firms that have not yet begun to raise prices, but seen profit margins cut to razor thin levels will attempt to recapture some measure of pricing power, which will further exacerbate pressure on core pricing.