We have the June Consumer Price Index (CPI) report in hand and indeed it came in hotter than expected for both the headline figure as well as the core reading for the month.
In short order, we've seen expectations for a 100-basis point rate hike at the Fed's upcoming monetary policy meeting this month move higher, now putting the likelihood at such an increase at 46% up from 7% yesterday. More than likely what we learn tomorrow with the June Producer Price Index will adjust those probabilities even further and waiting on that confirmation is one of the reasons the stock market is taking the June CPI report in relative stride.
By the numbers, the headline June CPI came in at +9.1% year over year, its hottest reading in decades, and a few ticks higher than the expected 8.8% figure and May's 8.6% reading. Turning to the core CPI, which excludes food and energy, it also came in hotter than expected at +5.9% in June vs. the 5.7% estimate and May's 6.0% reading.
Digging into the innards of the June report, we see a mixed picture of sequential inflationary pressures but also indications that some are easing. As most if not all of us can attest, energy costs were a major thorn in the side of the June report with the overall Energy component soaring 41.6% year over year and 7.5% vs. May. Those same energy costs were a likely factor in the Transportation Services sub-index rising both month over month and over year.
While the Food sub-index rose 9.1% year over year, food at home inched lower month over month offset by an uptick in food away from home. New vehicle costs as well as used car and truck prices contributed to the year over year increase in the report but both were down vs. May.
We know several commodity prices have trended lower in recent weeks, including those for oil and gas, but even a number of those commodities are still up on a year over year basis. This more than likely means we aren't likely to see a quick retreat in inflationary pressures in the near-term. We also know that companies are planning to instill further price increases to consumers in the coming weeks and months, another reason to think the downward path in inflation won't be a quick one.
The likely read through given the increases in Food and Energy prices in the June CPI report is consumer spending for items other than those deteriorated in June, especially on an inflation adjusted basis. We'll have confirmation for that likelihood with Friday's Retail Sales report.
Our suspicion is today's CPI report gives the Fed enough ammo to "go big" with its next interest rate hike. And while we have no hard evidence to back it up, we also think going big with a 100-basis point rate hike signals the Fed's serious intent to combat inflation and helps to restore its credibility, it also may offer some greater monetary policy flexibility later in the year.
As the market mood continues to adjust to this evolving landscape, we find that taking a step back can be helpful.
Even amid slower economic growth or even a recession, the demographic shift that fuels our Aging of the Population investment theme will continue. Given recent data on the growing volume of cyberattacks and ransomware, we rather doubt hackers are even paying attention to the speed of the economy when deciding whether to launch an attack. More than likely, hackers for hire will see a pick-up in their business should the economy continue to slow, necessitating continued spending on cybersecurity.
And should the economy slow dramatically from here, we would expect a greater emphasis on the release of Biden Infrastructure Law spending dollars to foster a shallow recession as well as help pull the economy out of it in short order.
Our plan will be to strategically wade into those positions in the portfolio that are poised to profit from those and other longer-term drivers.