The silver lining of inflation for ETF investors

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Inflation accelerated to a new 40-year high in June

The latest US inflation data released on Wednesday was even worse than analysts had estimated.

Energy prices were a major contributor to the higher-than-expected figure, with gasoline prices alone rising more than 11% from May to June. Compared to last year, prices have increased by 60%.

Food prices also contributed, rising 1% from May to June and 10.4% from a year ago.

The Labor Department said the consumer price index (CPI) rose 9.1% from a year ago in June, an acceleration from the 8.6% rate in May and another 40-year high. The rate was higher than the 8.8% sought by economists.

Source: ETF.com

This data will likely keep pressure on the Federal Reserve to raise rates further in an attempt to keep inflation under control.

As Richard Carter, head of fixed interest rate research at Quilter Cheviot, said: “This disappointment means that a 0.75% hike from the Federal Reserve at their next meeting is an absolute certainty and there could even be pressure from certain quarters to do more. .

“Central banks are clearly struggling to get inflation under control and if that number continues to rise or hover around that level, it will take more to bring it down, whatever economic consequences that might have.”

Markets were largely unfazed by the data. Although stocks fell sharply, the iShares Core S&P 500 UCITS ETF (CSPX) rallied to end the session down just 0.5%. The Invesco EQQQ Nasdaq 100 UCITS ETF (EQQQ) fell 0.2% and the SPDR Russell 2000 US Small Cap UCITS ETF (R2SC) lose 0.09%.

Investors digested the hotter-than-expected release much easier than last month, when a similar CPI report sent broad-market ETFs down 3%. The more subdued reaction this time around is likely a reflection of the steep losses stocks have already suffered. The S&P 500 fell into a bear market in June, days after the release of the previous CPI report.

Base prices rise more than expected

When you strip out volatile food and energy prices, the inflation picture isn’t much better. The CPI rose 5.9% from a year ago, more than the 5.7%, according to Bloomberg consensus estimates.

The biggest culprit was the price of housing, which is the biggest consumer expense, rising 0.6% month-over-month and 5.6% from a year ago.

Probabilities based on federal funds futures suggest the Fed will likely raise rates by 1% in its next interest rate decision on July 27, which would be the biggest rate increase in years. 1980.

However, most bond ETFs rallied after the release of CPI data, while yields on longer-term Treasuries fell amid recession fears.

The iShares US Aggregate Bond UCITS ETF (SUAG) gained 0.36% on Wednesday.

The 10-year US Treasury bond yield fell 5 basis points to 2.92% while the two-year Treasury bond yield jumped 8 basis points to 3.13%, further inverting the curve yields.

silver linings

As bleak as Wednesday’s CPI report was, there were a few upsides to consider.

On the one hand, commodity prices have started to fall, so in the coming weeks this should affect the prices consumers pay for energy and food.

Source: ETF.com

Second, the core CPI – which excludes food and energy prices – slowed for a third consecutive month, falling from a high of 6.5% in March to 6.2% in April, 6% in May and now 5.9% in June.

This is not very reassuring for consumers, investors and the Fed, who all want to see inflation closer to 2% than 6%. But it is at least a step in the right direction.

This story originally appeared on ETF.com

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