U.S. inflation rose a sharp 0.5% in June

U.S. inflation took a sharp tick upward in June, rising 0.5% on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Analysts were expecting an increase of 0.3%.

This is ‘headline’ inflation, technically called the Consumer Price Index for All Urban Consumers (CPI-U). It has risen 1.8% over the last 12 months, indicating that overall inflation remains mild.

For holders of TIPS and I Bonds, the important monthly number is the non-seasonally adjusted rise in inflation, which was 0.2% in June and 1.8% over the last 12 months. This number is used to determine increases in TIPS principal and future interest rates of I Bonds.

Energy costs were the driving force behind June’s increase in inflation.

  • The cost of gasoline rose 5.7%
  • The cost of fuel oil rose 6.3%
  • Overall energy rose 3.4%

Apparel was up a sharp 0.9% in June and medical care services was up 0.4%, breaking a string over very low monthly increases.

Core inflation. The Federal Reserve tends to watch core inflation, which it says it wants to contain under an annual rate of 2% and a danger level of 2.5%. Core inflation increased 0.2% in June, but only 1.6% over the last 12 months, well under the Fed’s goal.

For TIPS buyers? Higher inflation increases the attractiveness of TIPS as a shelter, but it also raises the fear of tightening by the Federal Reserve. TIPS have been in a bit of a rally since last Thursday, and that looks likely to continue today. Tomorrow, Federal Reserve Chairman Ben Bernanke will be speaking before Congress, and we can expect another news jolt leading up to Thursday’s auction of a 10-year TIPS.

Right now, it’s hard to see the long-term trend in headline inflation, which seems to jump in some months and plummet in others, usually along with energy prices.

1-year inflation

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