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Core CPI Jumps the Most Since 1991 Yet Little Bond Market Reaction

Economists underestimated year-over-year measures of inflation. The Bond market didn't.
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CPI Year-Over-Year Percent Change NSA 2021-06

The BLS reports CPI for all Items Rises 0.9% in June as many indexes increase.

  • The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in June on a seasonally adjusted basis after rising 0.6 percent in May.
  • This was the largest 1-month change since June 2008 when the index rose 1.0 percent. 
  • The index for used cars and trucks continued to rise sharply, increasing 10.5 percent in June. This increase accounted for more than one-third of the seasonally adjusted all items increase. 
  • The food index increased 0.8 percent in June, a larger increase than the 0.4-percent increase reported for May. 
  • The energy index increased 1.5 percent in June, with the gasoline index rising 2.5 percent over the month.

  • The index for all items less food and energy rose 0.9 percent in June after increasing 0.7 percent in May.

  • Owners' Equivalent Rent (OER) rose 0.3% following a 0.3% rise in May.

Year-Over-Year

  • Over the last 12 months, the all items index increased 5.4 percent before seasonal adjustment; this was the largest 12-month increase since a 5.4-percent increase for the period ending August 2008.
  • The all items index has been trending up every month since January, when the 12-month change was 1.4 percent.
  • The index for all items less food and energy rose 4.5 percent over the last 12-months, the largest 12-month increase since the period ending November 1991. 
  • The energy index rose 24.5 percent over the last 12-months, and the food index increased 2.4 percent. 
  • Owners' Equivalent Rent (OER) rose 2.3% from a year ago.

Econoday Economist Expectations

  • The consensus opinion was for the CPI to rise 0.5% month-over-month vs. the reported 0.9%
  • The consensus opinion was for the Core CPI to rise 0.5% month-over-month vs. the reported 0.9%
  • The consensus opinion was for the CPI to rise 5.0% year-over-year vs. the reported 5.4%
  • The consensus opinion was for the Core CPI to rise 4.0% year-over-year vs. the reported 4.5%

Last Night Tweets

Bond Market Reaction

I would have reported that Tweet after the report regardless. 

The initial reaction was indeed lower despite huge and unexpected jumps. I see now that the yield on the Long Bond is up 2.7 basis points and the 10-year yield is up 3.2 basis points.

This is a mute reaction.

Owners' Equivalent Rent

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OER (bold bullet point above) is the largest component of the CPI with a weight of 24.263%.

It is a measure of what homes would rent for if homes were indeed rented. Home prices are not in the CPI.

Debatably, homes are not a consumer item. So what. Tell the person seeking to buy a home that shelter is only up 2.3% from a year ago.

The Fed and BLS are making a serious mistake, again, regarding inflation by ignoring housing prices. That mistake led to the 2007-2010 house price crash and the Great Recession.

Yet, even without a proper measure of housing, prices are up 5.4% from a year ago.

For now, the economy is running very hot. Bubbles abound. The Fed, a collection of groupthink economic illiterates, is pleased. Consumers aren't.

The Real CPI

The Real CPI is much greater than the reported Real CPI. I will re-estimate the Real CPI shortly, factoring in housing. 

Stay tuned.

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