Consumer Price Index increased in the US, albeit at the slower pace the month before as home sales climbed. The economy is accelerating but the push isn’t strong enough yet to generate significant price increases. This was good for equities which rallied on prospects that the Fed will wait a bit longer for that first rate hike. The June inflation rose 0.4 percent, but at the time Janet Yellen’s assessment was that the pickup is temporary, which was proven this month as the growth slowed to 0.3 percent. The rates will probably stay low even trough the first half of 2015 bolstering case for the worlds biggest economy.
In line with the data from the Labor Department, which in fact differ from the Fed’s preferred measure, the PCI ( Personal Consumption Index ) were also the new home sales that were reported today. Sales rose to 5.04 million annual increase, which is a 2.6 percent rate, as reported by the National Association of Realtors. Stocks climbed on the news with S&P hitting record. 10 year Treasury Bond yields were stable at 2.48 percent while mortgage rates moderated after initial hike at the end of last year. CPI reported by the Labor Department has some problems in relation to housing as it consists 44 percent of the cost, but it is calculated by using a rent-alternative measure and not the real price.
On the annual level, prices were 2.1 percent higher than in June 2013, same as in May. Core measure which doesn’t include some more volatile items such as good or fuel rose only 0.1 percent, after a 0.3 percent increase in May showing the rise was indeed temporary as Yellen expected. This was the smallest rise in core CPI since February. On the annual basis it was 1.9 percent. While Yellen keeps the bullish tone, Bullard of the St Louis Fed thinks the rate hike may come somewhat sooner if the rapid drop pushes the inflation much above the goal. Bullard’s comments lowered stock prices even though he is not a voting member until 2016.
Even with low rates in the future, the central bank did retract some of the measures aimed at supporting the economy. Monthly asset purchases will be phased out in October. The FOMC has been reducing the purchases on every meeting since December 18, by 10 billion. Gasoline prices were the main driver of the CPI and Yellen was right to dismiss it as a threat since they are driven by expectations of supply issues in Iraq, Libya and now in Ukraine. Hotel accommodation and new car prices were the strongest groups pushing the core measure down. Hourly earnings were unchanged after a 0.1 percent drop last month.