Investors began their Tuesday with many distractions: a slew of big bank earnings, a flare-up of U.S.-Iran hostilities over the control of a certain waterway (reviving inflation concerns in the bargain), and Kevin Warsh's first day of Congressional testimony as Fed Chair.
Top it off with a cooler-than-expected CPI report.
The Labor Department's Consumer Price Index (CPI) USCPI=ECI, which tracks the prices urban consumers pay for a basket of goods and services, fell by 0.4% in June, marking a stark reversal from May's 0.5% increase and cooler than the -0.1% consensus.
Year-over-year, CPI posted a 3.5% increase, a deceleration from the prior month's 4.2% and 0.3 percentage points south of the 3.8% growth analysts expected.
Core CPI, which strips out volatile food and energy prices and is often referred to as "underlying inflation," printed on monthly and annual bases at 0.0% and 2.6%, respectively, both cooler than economists predicted.
It's the second take on June inflation, after the uptick in hourly wage growth reported on July 2.
"This (report) is a bit of a surprise," Peter Cardillo, chief market economist at Spartan Capital Securities, tells Reuters. "And with Mr. Warsh headed to Capitol Hill this morning, today's numbers might just give him some leeway to express some hope that inflation remains contained."
Line-by-line, a 5.7% monthly drop in energy prices and the consequent 9.7% decrease at the gasoline pump are welcome developments for the American consumer. Even so, prices at the pump remain 26.7% higher than a year ago.
Transportation costs fell by 2.5%, but are up 6.5% year-on-year. While the cost of an airline ticket rose by a mere 0.2%, it has shot up by 26.5% in the last 12 months. Food prices cooled down to 0.2%.
The cost of shelter rose by 0.1% from May and services were unchanged. Year-on-year, the two metrics—closely watched by the Fed—are up 3.3% and 3.2%, respectively. Both categories continue to coast well north of annual core inflation.
"Today’s better-than-expected core reading gives the Fed breathing room in deciding whether and when to raise interest rates,” says Kathy Bostjancic, chief economist at Nationwide. “That said, the renewed escalation of conflict in the Middle East and announced reimposition of a U.S. blockade has prompted a sharp reversal in oil and gasoline prices that introduces upside risk to our forecast."
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