June 2022

As expected, the Consumer Price Index (CPI) in June registered the highest inflation in 40 years.  Year-over-year the rate of price appreciation of the CPI came in at 9.1%.  In reviewing the details of the report, the source of the inflation is broad-based.  Even more troubling, recent surveys indicate that consumer expectations for future inflation are climbing.

Earlier this month the jobless report showed that the economy added 372,000 new jobs in June, well ahead of the 265,000 that was expected.  Given the anecdotal weakness we’ve been witnessing, our expectation was that the jobs figure would disappoint.  Contradicting the headline number, the household survey showed a decline in the labor force of 353,000 jobs.  As we’ve explained previously, the two measures are usually directionally in agreement, but not always. 

Given the magnitude of the employment and inflation reports, it now seems likely that the Open Market Committee will raise the Fed Funds rate by 75 basis points at the July 27th meeting, and 100 basis point hike can’t be ruled out.  On July 13th , the Bank Of Canada (BOC) raised the Canadian overnight  rate by 100 basis points.  That’s not to say that the BOC and the Fed coordinate policy.  But if they don’t follow the aggressive move by the BOC they run the risk of further criticism on their inflation fighting “creditability”.

At the time of this writing, second quarter earnings have begun to be released.  It will be telling to understand how U.S. corporations are reacting to the persistent inflation and, in turn, how consumers are reacting.  Also telling will be the initial release of Q2 GDP on July 28th.  The Atlanta Fed’s GDPNOW, a real time economic forecasting tool, registered -1.86% for Q2 GDP.  If that forecast does come to pass when GDP is released later this month, the U.S. will officially have been in a recession for the entirety of 2022, and the Fed has been tightening into it, and continues to do so.

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