The Market Just Bought A GHOST... Why Today's CPI Is Already Dead!

The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) for June fell 0.4% on a seasonally adjusted basis, the largest one-month drop since April 2020. The year-over-year rate dropped to 3.5% from 4.2% in May. This decrease is primarily attributed to a 5.7% fall in the energy index, with gasoline prices down 9.7% for the month. Core CPI, excluding food and energy, remained flat for the month at 0% and is still running at 2.6% year-over-year.

The seemingly positive June CPI, especially for gasoline prices, was a result of a brief ceasefire between the US and Iran, which temporarily opened the Strait of Hormuz and caused oil prices to fall. This situation existed during June when the BLS collected its data. However, the ceasefire ended on July 8th, with renewed hostilities and a significant drop in tanker traffic through the Strait. Oil prices, specifically Brent crude, have surged to around $87 a barrel, and a 20% toll has been imposed on cargo transiting the Strait.

The June CPI is backward-looking. The July CPI, to be published in August, will reflect the current, much higher energy prices. The Federal Reserve's FOMC meeting is on July 28th-29th. Despite the June report, Fed Chair Kevin Warsh has maintained a hawkish stance on inflation, noting that prices are "too darn high" and core inflation remains above target. Markets initially lowered the probability of a July rate hike due to the soft headline CPI, but the September odds remained largely unchanged. Shelter costs, a significant component of CPI, also remain high.

Investors should understand that the current market rally based on the June CPI is a reaction to outdated information. The underlying reality of energy prices and geopolitical tensions has changed. It is crucial to monitor the Strait of Hormuz, tanker traffic data, Brent crude prices, and statements from Fed officials. Most importantly, focus on core CPI, which reveals the true underlying inflation trends, rather than the headline CPI, which is heavily influenced by volatile energy costs and reflects a past market environment.