Still-high inflation will do nothing to bring down the US’s increasingly high bond yields.
- US CPI data showed prices rising at 3.4% a year in June, down from 3.5% last month
- The most significant contributor to this month’s inflation was shelter, with energy costs down 1.5%
- There is little sign that high US bond yields are coming down
US inflation data turned out as expected. Economists breathed a sigh of relief and it was certainly not high enough to panic stock markets. However, neither was it low enough to offer any consolation that inflationary pressures were ebbing. US bond yields remained stubbornly high as a result.
US CPI data showed prices rising at 3.4% a year in June, down from 3.5% last month. This was helped by a 1.5% drop in energy prices, with markets reflecting a temporary easing of hostilities in the Middle East. Core inflation rose 0.2% month-on-month, with the annual rate cooling to 2.5% from 2.6%.
While this does not make the case for an imminent rate rise, neither will it reassure policymakers that inflation is beaten. For example, the most significant contributor to this month’s inflation was shelter, accounting for approximately two-thirds of the gain in the CPI. This was in spite of a 3.3% drop in prices for hotel and motel rooms. While it would be possible to dismiss volatile energy prices as a temporary phenomenon, these other factors look more entrenched.
George Brown, senior economist at Schroders, says: “Today's inflation data does little to settle the debate around the Fed's next move. While the labour market appears to have softened, measures of underlying inflation continue to flash red, leaving policymakers with conflicting signals heading into the September meeting.”
The picture has been complicated by the ambiguous messaging of new Fed Chair Kevin Warsh. Investors have been nervous over his commitment to price stability, with his actions apparently not matching his strident rhetoric on inflation control. It has allowed investors to worry that he is not impartial and that, in itself, is a concern.
Brown says the Federal Reserve is aware of the problem: "The Fed will be wary not to further sow doubts about its commitment to price stability. Following the recent sell-off in long-term Treasuries, policymakers are likely to place a premium on maintaining confidence that inflation will ultimately be brought under control.”
As it was, treasury bonds were stable in response to the inflation data, but there is little sign that yields are coming down. 10 and 30 year yields remain higher than at any point since 2007. It suggests the market is losing faith that the Federal Reserve is committed to fighting inflation. With national debt at almost $40 trillion, that could prove very expensive for US policymakers.
