By David Enna, Tipswatch.com

U.S. inflation surged 0.9% in June, much higher than expectations. It was the fifth month in a row that actual inflation far exceeded consensus estimates.

My conclusion: Economists really have no idea where inflation is heading.

What happened? The Consumer Price Index for All Urban Consumers increased 0.9% in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. This was the largest 1-month change since June 2008 when the index rose 1.0%. Over the last 12 months, the all-items index increased 5.4%, the largest 12-month increase since a 5.4% increase for the period ending August 2008.

This was the fifth month in a row that inflation has exceeded consensus estimates, and follows monthly increases of 0.6% in May (consensus was 0.4%), 0.8% in April (consensus was 0.2%), and 0.6% in March (consensus was 0.5%).

Core inflation, which omits food and energy, also surged 0.9% in June and has increased 4.5% over the last 12 months, the BLS said. Both of those numbers came in much higher than expectations.

Part of the “theory” of the higher inflation numbers for February to May 2021 was the very low baseline comparisons for the same months of 2020, when inflation sank to near zero during the rise of the pandemic. But that’s not the case for June, because inflation increased 0.6% in June 2020, certainly not a “depressed” number.

So, essentially, economists cannot predict with any certainty where inflation is headed in 2021 and beyond. The Federal Reserve — which has started “talking about talking about” scaling back monetary stimulus — may have a better idea, but we can expect easy monetary policy to continue for many more months, well into 2022.

In today’s report, the BLS noted that the index for used cars and trucks surged 10.5% in June and is up a remarkable 45.2% over the last year. This one price index accounted for more than one-third of the overall all-items increase, the BLS said. That’s a trend that will not continue, obviously. But …

• Food prices rose a lofty 0.8% in June and are up 2.4% year over year.
• The beef index rose 4.5% in June, its largest increase since June 2020.
• The cost of new vehicles rose 2.0% in the month and 5.3% for the year.
• Gasoline prices rose 2.5% for the month and 45.1% for the year.
• The index for natural gas increased 1.7% in June, as it did in May.
• Shelter costs rose 0.5% for the month and 2.6% for the year.
• The costs of apparel rose 0.7% for the month and are up 4.9% for the year.

The overall picture is clear: Inflation is surging across the U.S. economy. How long will that continue? No one knows, including economists, obviously.

Here is the 12-month trend for both all-items and core inflation:

What this means for TIPS and I Bonds

Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances on TIPS and set future interest rates for I Bonds. For June, the BLS set the inflation index at 271.696, an increase of 0.93% over the May number.

For TIPS. Today’s inflation report means that principal balances for all TIPS will increase 0.93% in August, following increases of 0.80% in July, 0.82% in June, 0.71% in May, and 0.55% in April. That’s a remarkable increase of 3.8% in just five months. Here are the new August Inflation Indexes for all TIPS.

For I Bonds. The June inflation number is the third in a six-month series that will determine the I Bond’s semi-annual inflation rate for the months of April through September. So far, three months in, inflation has been running at 2.57%, which will translate to an annualized variable rate of 5.14% for the November 1 reset, much higher than the current (and still very attractive) rate of 3.54%. All I Bonds will eventually get November’s new annualized rate. But keep in mind that three months remain, and inflation in summer months can be quite volatile.

Here are the numbers so far:

What this means for the Social Security COLA

Social Security’s cost-of-living adjustment for 2022 will be set using a complex formula that averages third-quarter inflation (July, August and September) and compares that to the average a year earlier. But it is based on a different inflation index: the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

For June, the last month before the COLA formula kicks in, the BLS set the CPI-W index at 266.412, which is 6.1% higher than the number for June 2020. But don’t be confused by that June number. It is simply setting a baseline for the next three months, which actually count in the COLA formula. Last year’s three-month average was 253.412, and the June number is 5.1% higher than that average.

I’ll be writing about the Social Security COLA later this month and then will provide updates with each inflation report for July to September.

What this means for future interest rates

I imagine the Federal Reserve will now be changing its language about “transitory” inflation to “an extended period of higher inflation.” The Fed appears to be comfortable with that, but a five-month string of higher-than-expected inflation has to be causing concern. If an inflationary mindset seizes control of the U.S. economy, that is a very hard trend to break.

The Fed says it has the “tools” to control runaway inflation, but we know it will be very, very reluctant to use those tools, which could bring havoc to the stock and bond markets.

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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.