US CPI: Fed’s gradually increasing inflation outlook remains intact - Wells Fargo

According to analysts from Wells Fargo, today’s US CPI numbers show a broadening pickup in June and that the Federal Reserve gradually increasing inflation outlook remains intact.

Key Quotes:

“Showing signs of some acceleration, consumer price inflation increased for the fourth straight month in June, with the headline Consumer Price Index (CPI) rising 0.2 percent. June’s performance resulted in headline CPI increasing at a 2.5 percent annualized rate in the second quarter, the fastest quarterly pace since Q2 2015. The year-over-year rate remained steady at 1.0 percent.”

“Excluding food and energy, core consumer prices posted another solid 0.2 percent increase last month–spot on its three, six and twelve month moving averages. Consistent with themes in the broader economy, the strength of core CPI is still entirely concentrated in services, which is running at its post-recession high of 3.2 percent year-over-year.”

“As reported in the June FOMC meeting minutes, most Fed officials expect to see continued progress towards the Committee’s two percent inflation objective. Today’s CPI report does nothing to dissuade those expectations. Officials’ confidence over the outlook is based on firming core inflation, evidence of stronger wage growth, tightening resource utilization and firmer oil prices–all supportive factors to higher inflation over time.”

“A major concern to Fed doves, historically low levels of long-term inflation expectations should pick up in the coming months given the anticipated rise in the year-over-year pace of headline inflation. On our projection for a 1.7 percent year-over-year pace in Q4, we expect the upturn in headline inflation to support a modest turnaround in consumers’ inflation expectations, thereby placing the Fed in a better position to consider an interest rate hike at year’s end.”