Inflation Moderation Is No Head Fake This Time
Unlike last year, this summer optimism seems better rooted, and stock and bond markets are taking notice.
Lower prices of used cars and trucks helped cool inflation in June.
Photographer: Spencer Platt/Getty Images
Maybe it’s something about the dog days of summer — the record heat in the last few weeks has made everyone a little delirious — but the July-August period is proving particularly popular for “pivot” rallies in US financial markets. Last summer, of course, yields on two-year Treasury notes fell all the way to 2.82% before Federal Reserve Chair Jerome Powell upended gains with his infamously hawkish Jackson Hole speech. Right on schedule, the latest consumer price index on Wednesday seems to be lighting a fire under bond market bulls once again. This time, however, there might actually be something to it.
The Bureau of Labor Statistics said that consumer prices rose just 3% in June from a year earlier, the mildest year-on-year change since March 2021. Inflation watchers tend to focus more on less volatile measures of the “underlying” trend, but even the under-the-hood metrics seem to be pointing increasingly in the right direction. Core CPI, which excludes food and energy, was up just 4.8% from a year earlier (lowest since October 2021) while non-shelter core inflation was up just 2.8%. Yields on two-year Treasury notes fell about 16 basis points after the report, the most since May, extending the four-day decline to 0.27 percentage point. Meanwhile, the S&P 500 Index jumped 1.1% and appeared poised for the highest close since April 2022. Compared with last summer’s mirage of a rally, this one clearly has some fundamentals for investors to hang their hats on.