US inflation appears to have peaked

For months, the Federal Reserve has continued to claim that inflation in the US was transitory. Today’s data suggests that inflation was in the process of peaking in July. Month on month US CPI has dropped to its lowest monthly growth since February, whilst core CPI growth was at a 4 month low.

Here are the headlines on inflation:

  • Headline CPI Month on Month +0.5% (+0.5% exp, +0.9% in June)
  • Headline CPI Year on Year +5.4% (+5.3% exp, +5.4% in June)
  • Core CPI MoM +0.3% (+0.4% exp, +0.9% in June)
  • Core CPI YoY +4.3% (+4.3% exp, +4.5% in June)

The big differential seems to be that the sharp price rises in the Used cars and trucks component have eased. However, it is also notable that Energy prices are still a key factor for headline inflation.

This data reflects the declining price pressures of the ISM Manufacturing survey recently and eases some pressure on the Federal Reserve where members such as Thomas Barkin give reason to already be moving to tighten interest rates. 

We see inflation falling back to be risk positive. Falling yields are also marginally USD negative, although this comes against the backdrop of broad improvements in the labour market and US economic strength. Taken with this, a peak in inflation should not be seen as a negative. We see any kick-back against recent USD strength (especially versus EUR) as being near term. We also believe that any rebound on Gold will be short-lived.


Initial Market Reaction

Initial moves have been risk positive and mildly USD negative. Falling inflation is negative for yields and is weighing on USD. Less pressure on the Fed to tighten is also positive for risk appetite (see indices moving higher) and also providing support for gold near term.

  • US 10 year Treasury yield -3bps
  • EUR/USD +20 pips
  • S&P 500 futures +12 ticks
  • Gold +$4