U.S. June Core CPI Up 0.3% as Total Inflation Surges 1.1%

The seasonally adjusted U.S. Consumer Price Index rose more than expected on both fronts, as the core rate ticked up 0.3% (0.323%) in June, contributing to a 2.4% year-over-year change, and total inflation rose 1.1% (1.056%) in the month and 5.0% on the year, according to data released by the U.S. Labor Department on Wednesday.

The consensus was looking for a 0.2% gain in the core and a 0.7% rise in total inflation.

"The core overshoot follows a run of three good months in the past four and is no big deal," said Ian Shepherdson, chief U.S. economist at HFE.

Writing on the 5.0% headline gain, which is the highest annual figure since 1991, Shepherdson said, "the overshoot in the headline was due to much bigger increases in non-gasoline energy than we expected, with fuel oil etc up 8.5% and gas/electric utilities up 1.5%."

Paul Ashworth, senior U.S. economist at Capital Economics, said "The news on headline CPI inflation couldn't really have been any worse." He noted the "staggering" 1.1% monthly advance was the largest in 26 years.

On the core rate, he said the "bigger-than-normal increase may have been some overdue payback for a run of below average gains over the past few months."

Energy prices rose 6.6% in June and are up 24.7% on the year, while gas rose 10.1% in the month and 32.8% in the year.

Food and beverages rose 0.7% on the month and are up 5.2% year-over-year. Commodities rose 1.9% from the previous month and are up 6.9% on the year.

Owners' equivalent rent rose 0.3% from the previous month and is now 2.6% higher than the same period last year.

The index for housing rose 0.5% in June following a 0.5% increase in May. Services advanced by 0.5% in June, contributing to a 3.7% annual increase.

Prices for personal computers fell 1.4% in the month, representing an 11.9% decline from a year prior.

Choppy trading in the USD followed the CPI release with the greenback trading in the 1.587 and 1.591 range before settling somewhere in the middle, and in the 1.0016 to 1.0028 range against the Canadian dollar.

Bond markets reacted by selling off with yields on the two-year note moving five basis points higher to 2.405% and the 10 year-yields up 2.5bp to 3.868%. The December euro dollar contract lost as much as 4 ticks to 96.995 before retracting to near pre-release levels.

David Ader from RBS Greenwich called the market reaction subdued. "Market is off, but not drastically - actually holding okay. Curve holding a bit steeper, though off the wider levels." He said the stronger-than-expected figures boxes the Fed into a tight position.

By Patrick McGee and edited by Stephen Huebl