US consumer prices rise in June; inflation likely to keep rising modestly through 2016

US consumer prices for the month of June came in a tad below market projections. Inflation accelerated 0.2 percent, as compared with consensus forecast of 0.3 percent rise. Core inflation, excluding energy and food, also rose 0.2 percent on month. On an annual basis, the headline inflation of the US was 1 percent, whereas core inflation continued to rise to 2.3 percent year-on-year. Core inflation was consistent with its peak from earlier in 2016.

However, June’s data implied that there continues to be restricted price pressures overall with the headline figure at just one-half of the US Fed’s target rate, noted TD Economics in a research note. But given that oil prices are expected to keep increasing modestly throughout this year, headline inflation is likely to accelerate later in 2016 and reach a peak of about 2.7 percent by the first quarter of 2017 as the favorable base year effects before slowing slight closer to the core measure, according to TD Economics.

“We expect core inflation to maintain its current pace for the remainder of the year as the disinflationary impetus from a higher U.S. dollar weighs on core goods prices and helps balance the much hotter core services goods inflation – resulting from producers attempting to pass on the rising production costs, partly related to building wage pressures”, added TD Economics.

Even if inflation is not an immediate worry for the US economy of the Fed, financial markets see slightly content to the threat of higher inflation. The core personal consumption expenditure deflator, the US Fed’s preferred inflation measure, is likely to accelerate as the year progresses. Even if the Fed is unlikely to hurry into further tightening, accelerating inflation might increase the possibility that the Fed may hike before the year ends.

Looking at June’s CPI data, energy prices mainly drove the rise in headline figure. Energy prices rose 1.3 percent on sequential basis, thanks to increase in gasoline prices that were up 3.3 percent month-on-month. However, it was slightly countered by declining electricity prices.

Services continued to lead the gains in core prices that witnessed widespread price growth throughout categories. Core services inflation continued to be stable at 3.2 percent year-on-year. Meanwhile, core goods prices dropped for the fourth straight month, brought down by apparel, used vehicles and new vehicles.