June US CPI Recap

US CPI came in hot this morning at 1% month-over-month, beating consensus estimates of 0.7%. Recent high frequency data suggested a moderate beat of 0.8-0.9%, but today’s reading points to a sustained level of elevated price increases that has broadened.

Core CPI, which excludes food and energy prices, also rose this month at a pace of 0.6% vs. an estimate of 0.5%. While the primary subset of Core CPI is declining sequentially, the disinflationary dynamics we are observing (bloated inventories, restocked car rental businesses, shrinking consumer savings, decline in new home sales) will take a longer period of time to moderate inflation at a broader level.

As of this morning, the market has priced in another ~1.5 rate hikes this year since last month’s data print, which adds up to another 50bp hike (prior was for June and July, but now add September to the list). The implied Fed Funds Rate by the end of the year now stands at 3%, up from an effective FFR of ~0.83% today. The result is a reduction in the price multiple of assets (such as P/E multiple), which will hurt longer duration assets (like growth stocks, crypto, high yield, and EMs) the most.

While green shoots of inflation-moderation exist (decline in average hourly earnings, recent fall in jet fuel prices, and increase of US auto production), it is too early to call the peak. Our short-term view is to expect continued pressure on equity and long-duration multiples for at least the next two months, which we believe will limit near-term upside. However, growth for 2H of 2022 remains on track due to improving China data, robust consumer spending, and high levels of capex.

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