U.S. Data Release: Consumer Price Index (June 2015)

• Consumer prices rose 0.3% (month-over-month) in June, on par with expectations. Core CPI (excluding food and energy) was up 0.2%, also in line with the consensus estimate.

• On a year-over-year basis, overall consumer price inflation rose to 0.1% from 0.0% in May. Core CPI (excluding food and energy) hit 1.8% from 1.7% previously.

• Energy prices rose 1.7% (m/m), while food prices were up 0.3%, the strongest month of growth since September of last year.

• Core price growth was entirely a services story. Non-energy services inflation rose 0.3%(m/m). Shelter was up 0.3%, led by a 0.4% rise in owners' equivalent rent.

• In contrast, core goods prices (commodities excluding food and energy) fell 0.1% with apparel prices (-0.1%), used cars and trucks (-0.4%), and alcoholic beverages (-0.2%) all declining in the month.

Key Implications

There was nothing particularly surprising in this report. All of the summary measures came in right on expectations. Inflation continues to move in the upward direction the Fed wants to see, providing it with comfort that disinflationary pressures are abating. Price dynamics are likely to slow in the months ahead. Energy prices have been declining through July and heightened global risks have once again put the dollar on an upward trajectory. Still, with the domestic recovery continuing to gain traction, these are likely to prove a temporary pause in inflation's march higher.

The strong growth in rents is largely due to a lack of supply. This is not a characteristic of a strong housing market, but rather a relatively weak one that is still hard for first-time homebuyers to break into. Importantly, shelter carries a much lower weight in the Fed's preferred PCE measure, and so there is reason to disregard some of the upward pressure this is putting on core inflation. While the lack of supply in the housing market may not stall the Fed from raising rates, it will temper the rate at which they increase them, says TD Economics.