US Consumer Price Index June Preview: Prices slowly return to normal

• Annual CPI in June forecast to climb to 0.3% from 0.1%.
• Core yearly CPI expected to rise to 1.3% from 1.2% in June.
• CPI is the precursor to the Fed’s core PCE index later in the month.
• Currencies will not react to a recovering inflation rates.

Consumer prices that collapsed in March and April have begun to return to normal as people return to work and shopping, and the country puts the complete lockdowns of the spring behind it.

The consumer price index is expected to jump 0.4% in June after the 0.1% drop in May. Core prices are forecast to rise 0.1% following the May 0.1% decline. 

Annual prices are still feeling the effects of the sharp declines in the monthly figures but are predicted to resume positive movement, with the overall index rising to 0.3% in June from 0.1% and the core measure edging up to 1.3% from 1.2% in May.

Retail sales and consumption

The record 17.1% surge in retail sales in May and the projected 4.8% continuation in June halted the step discounting that had dropped the monthly index to -0.8% in April its largest fall since the financial crisis and brought the core index to -0.4% is biggest drop on record.

Retail sales

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Retail sales had plunged 14.7% in April, the largest one month drop in the series history.  The May rise in sales was more than double its 8% forecast. 

Durable goods, the long-duration set of sales, fell 18.1% in April and rebounded 15.8% in May, beating the 10.9% prediction.  Non-defense capital goods, the business investment proxy, dropped 6.5% in April, then rose 2.5% in May, much more than the 1% estimate.

Personal spending climbed 8.2% in May following the 12.6% April tumble and was the only consumption gauge to miss its forecast at 9%.  

Consumer confidence and payrolls

The unexpected 2.5 million increase in May payrolls and the June addition of 4.8 million produced the largest jump in US job rolls in history. Much as the April loss of 20 million positions was exponentially larger than any decline on record.

Non-farm payrolls

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Together the actual figures for May and June were 7.499 million new jobs, a swing of 12.499 million over the consensus forecast for a loss of 5 million jobs in  May and June, surely  the largest beat in the history of economic forecasts.

The improving employment picture has helped consumer outlook to rebound.

The Michigan Survey of Consumer Sentiment has recovered from its April low. The two month drop from February to April in the sentiment, current conditions and expectations indexes was the steepest in the 68 year series. 

The current conditions index rebounded the most--April 74.3 to June 87.1, followed by overall sentiment--April 71.8 to June 78.1--and then expectations--April 70.1 to June 72.3. 

Conference Board figures showed a sharper gain. The consumer confidence index jumped to 98.1 in June from 85.9 in May, easily trumping the 91.6 forecast. The present situation index climbed to 86.2 from 68.4 and the expectations index rose to 106.0 from 97.6.

Fed, CPI and PCE

The Fed’s 2% core PCE target has been largely a rhetorical concern since the financial crisis. Except for a few months in 2012 and again last year the core PCE rate has not been symmetric around the target, but permanently beneath.

The gains in late 2018 and early 2019 were lost in the second half of the year and then subsumed in general pandemic collapse in consumption.   

The Fed and the Federal government have larded the US economy with $6 trillion in financial, economic and payroll support. Central bank bond buying has brought mortgage rates to their lowest in history.

When this liquidity is combined with the continuing return of employment and consumption, price increases are likely to continue their return to normal levels.   

Conclusion and the dollar

The consumer price index is an indicator for the Fed’s preferred core PCE gauge.  Compiled by the Bureau of Labor Statistics it is the older of the two series and tends to produce a slightly higher rate of inflation.  The PCE price index from the Bureau of Economic Analysis incorporates item substitution and several other features that diminishes the impact of higher prices on the gauge.

Higher inflation, particularly rising long term expectations traditionally lead a central bank to consider raising interest rates. In the monetarist world of Paul Volcker and the successful fight against inflation of the last generation that link was natural.  It is no longer. 

Inflation at the levels current today do not provide either a reason or a clue to policy action as such their effect on the markets will be minimal.