‘Headline’ inflation, technically called the Consumer Price Index for All Urban Consumers (CPI-U), increased 0.2% in July on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, CPI-U has increased 2.0%.
For TIPS and I Bond holders, the important number is the non-seasonally adjusted CPI-U, which is used to adjust the principal of TIPS and set the future interest rate of I Bonds. That number for July was zero – no change – but the last-12-months number remains at 2.0%.
Core inflation, which strips out volatile food and energy prices, was up 0.2% in July, and is up 1.7% over the last 12 months, below the Federal Reserve’s 2.0% target and 2.5% ‘danger’ level. This number, which is closely watched by the Fed, is significant because it gives the Fed no reason to taper or halt its bond-buying stimulus.
Some highlights from the CPI-U statistics for July:
- Energy was the biggest factor in an otherwise mild inflation month. Gasoline was up a strong 1%, and fuel oil, 1.1%. But utility gas service was down 2.8%.
- Over the last 12 months, gasoline prices are up 5.2%.
- Apparel was up a strong 0.6%, after posting a 0.9% increase in June.
- Medical care services prices continued rising very slowly, up 0.1% in July and only 2.6% over the last 12 months.
- Prices for used cars and trucks fell 0.4% and are down 2.1% over the last 12 months.
And here is the CPI trend over the last 12 months:
What it all means. The July inflation number came in just as predicted, at 2.0% seasonally adjusted. This is a moderate rate that the Federal Reserve can live with, and it wants to see inflation rising above 2.0% a year. So today’s report shouldn’t have much of an effect on the Fed’s bond-buying, and it probably won’t have much effect on TIPS yields.
If you are looking at next Thursday’s auction of a 5-year TIPS reissue, the yield on the secondary market for CUSIP 912828UX6 closed at -0.501%, up a bit since I wrote about it last week. The Treasury’s statistical site is showing a real 5-year yield of -0.38%, substantially higher.
Update at 1:30 p.m.: While Thursday’s inflation number was muted, other economic reports out today gave a rosier economic picture:
- Initial jobless claims fell by 15,000 last week to 320,000, marking their lowest level since October 2007.
- In a Wednesday report, European GDP rose 0.3% in the second quarter, better than expected and marking an end to European recession.
- In reaction, Treasury yields rose sharply this morning, with the 10-year nominal Treasury hitting 2.77% (the highest rate of the year) and the 10-year TIPS rising to 0.57%, The 5-year TIPS, according to Bloomberg data, rose to -0.40%.