U.S. Core Consumer Inflation Tops Projections in Broad Gain

(Bloomberg) -- A key measure of U.S. consumer prices rose more than forecast in June, potentially complicating the Federal Reserve’s assessment of inflation as policy makers weigh an interest-rate cut as soon as this month.

The core consumer price index, which excludes food and energy, rose 0.3% from the prior month, the most since January 2018, and 2.1% from a year earlier, Labor Department data showed Thursday. Both figures exceeded estimates. The broader CPI climbed 0.1%, also more than projected, and 1.6% annually.

The report showed broad monthly gains in the core categories, including pickups in costs for shelter, used vehicles, clothing, and home furnishings and operations.

The firmer inflation readings follow Fed Chairman Jerome Powell’s testimony to lawmakers Wednesday that there’s “a risk that weak inflation will be even more persistent than we currently anticipate.” Also Wednesday, minutes of the June policy meeting showed officials judged uncertainties and risks to the economic outlook had increased significantly, strengthening the case for a rate cut at their July 30-31 meeting.

“Despite the fact that core prices were a little bit stronger than expected, I don’t really see this as a sign of any resurgence in inflation,” said Gregory Daco, chief U.S. economist at Oxford Economics. The data still support the Fed’s preferred inflation measure undershooting its 2% target in the second half of the year and “therefore support the dovish stance” when policy makers gather.

Inflation, measured by the Fed’s preferred gauge, was 1.5% in the year through May and has been below target for most of the past seven years while the closely watched core index rose 1.6%. President Donald Trump, who along with aides has repeatedly pressured the Fed to cut rates to support growth, has also cited low inflation as a reason for easing.

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“The June CPI report vindicates Federal Reserve Chairman Jerome Powell’s earlier assessment that some of the recent slowdown in inflation was at least partially due to transitory factors . . . Firming underlying inflation will not stop the Fed from easing in July.”
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A separate report from the Labor Department Thursday showed filings for unemployment benefits fell to the lowest level since mid-April, adding to signs of a robust job market.

Jobless claims dropped by 13,000 to 209,000 in the week ended July 6, below all estimates in a Bloomberg survey of economists that had projected 221,000. The reporting period included the July 4 holiday, which may add to the volatility of the readings.

U.S. stocks opened higher, with the Dow Jones Industrial Average surpassing 27,000 for the first time, while the yield on the 10-year Treasury rose.

Read more: Traders Still See Fed Cut After CPI, But Odds of Bigger Move Dip

The CPI report showed prices for used cars and trucks rose 1.6% from the prior month and 1.2% from a year earlier. Apparel, which has been volatile in recent months, rose 1.1% on the month while dropping 1.3% annually.

Energy prices slipped 2.3% from the prior month as gasoline prices fell 3.6%. Food costs were unchanged.

Shelter costs, which make up about a third of total CPI, rose 0.3% on the month, as did owners-equivalent rent, one of the categories that tracks rental prices. Rent of primary residence was up 0.4%.

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• The index for household furnishings and operations rose 0.8% from the prior month, the most since 1991, reflecting a record 6.1% jump for gardening and lawn care services.
• A separate Labor Department report Thursday showed how inflation is affecting consumer spending power. Average hourly earnings, adjusted for price changes, rose 1.5% from a year earlier after a 1.3% gain in May.
• Economists surveyed by Bloomberg had forecast the core gauge would rise 0.2% from the prior month and 2% from a year earlier, with the broader index was seen unchanged from the prior month and slowing to 1.6% annually from 1.8% in May.

To contact the reporter on this story: Reade Pickert in Washington at epickert@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Jeff Kearns, Vince Golle

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