Reviews of US inflation (CPI and PPI) and retail sales.

The June US inflation had increased to 9.1% year on year.

US inflation breakdown:

US inflationary sector:

The June US PPI increased to 11.3% year on year.

The PPI for goods was showing an uptick but the PPI for services was indicating a downtick.  This PPI phenomenon was completely different from CPI whereby the CPI for goods was showing a downtick but the CPI for services was indicating an uptick.

What does this mean?

This meant that the CPI was being pulled up by services prices while the PPI was being pulled up by goods prices.  From another perspective, we can say that the consumers are cutting back on their goods purchases which will cause an inventory overhang in the future.  Simultaneously, the producers are producing goods at higher prices but they can't sell at higher prices and this will cause their margins to diminish as they've to absorb the rising costs.  Therefore, we can foresee the earnings per share (EPS) to fall in the future.

The chart below showed the difference between CPI and PPI.

The US retail sales figure after factoring in the sky-high inflation had shown that consumers purchased fewer items.

Just as the CPI & PPI statistics suggested, the retail inventories had been building up because of declines in consumer spending caused by the elevated inflation.  Thus, it looked like demand destruction had already begun and this would cause the economic growth to slow down (recession).

Consequently, the long-term inflation expectation (inflation outlook) declined because the consumers expected the US recession to lower US inflation in the future and this boosted the consumer sentiment.

What happened after the CPI was released?  The Fedwatch tool showed that the probability of a 1% rate hike in July spiked to 83.3% immediately.

However, the probability dropped significantly after 3 Fed officials supported a 75bp rate hike.

Therefore, we can project that the next hike will either be 75bp or 100bp.  Which one will it be?

In view of the above-mentioned factors (Demand destruction, falling EPS, and recession), we think that the Fed will likely hike by 75bp and wait for more inflationary data to act further since there is no FOMC meeting in August.  The Fed will have the room to do an emergency hike in August if the inflationary situation warrants it.

Nevertheless, we will continue to monitor US inflation and provide an update whenever necessary.