There were two important reports on the U.S. economy released this morning. First, data from the Bureau of Labor Statistics (BLS) showed that the consumer price index (CPI) for all urban consumers rose by 0.2 percent on a seasonally adjusted basis in May, less than economists expected but still the third month-over-month increase in a row. “Core” CPI, which excludes the volatile food and energy components, also lifted by 0.2 percent in May, significantly more than expected and resulting in a year-over-year gain of 2.2 percent. The firmer inflation reading last month was driven largely by services costs (+3.2 percent y/y), including 0.3 percent and 0.5 percent increases for transportation and medical services prices, respectively. Moreover, hospital-related services costs were up 3.3 percent year-over-year, and the health insurance CPI has risen by 6.3 percent over the past twelve months. Shelter costs (rents) have also been a big driver of consumer inflation over the past few years and this component lifted by another 0.4 percent in May. Altogether, this report showed that inflation pressures in America continue to slowly build and this will help justify Federal Reserve officials’ eventual decision to continue with interest rate normalization.
Elsewhere, a report from the Federal Reserve Bank of Philadelphia showed that manufacturing activity in the Mid-Atlantic region of the country rebounded this month, with the general business conditions index rising from -1.8 to +4.7 in June. This was much better than expected and the highest reading since March, although still only the second positive (expansionary) print of the past ten months. Further, the headline increase was largely due to a spike in prices paid (input cost inflation), which along with a decline in prices received signaled margins being under pressure, similar to what yesterday’s data from the New York Fed showed. Moreover, gauges of new orders, shipments, and total employment all deteriorated in June, and forward-looking measures of expected business conditions and capital expenditure plans also softened. Managers in this month’s survey were asked a series of special questions about their production plans for 2016. Overall, respondents see production increasing over the next few quarters and to achieve this, most respondents indicated that they would try to boost the productivity of current workers (42 percent) rather than increase the number of hours worked by current staff (29 percent) or hire additional workers (23 percent).
Sources: Econoday, Twitter, Bloomberg, ZH, U.S. DoL, FRBP, FRBSLPost author: Charles Couch