The stronger than expected 1.3% rise in consumer prices in June, pushing headline inflation to 9.1%, from 8.6%, all but guarantees another 75bp hike at the July meeting but with commodity prices falling sharply and wage growth moderating in recent months, the outlook for inflation does not look as bleak as it did a month ago. Accordingly, speculation about a 100bp hike this month seems to be misplaced.

The 7.5% month-over-month rise in energy prices contributed to half of the increase, with gasoline prices up by 11.2% and piped gas prices rising by 8.2%. The good news is that the recent wholesale price collapse suggests those moves will fully reverse this month. The 1% rise in food prices was partly driven by higher cereal and dairy prices. Again, those large gains should be reversed in the coming months with agricultural commodity prices falling.

Overall, this report confirms that the Fed will need to hike rates by 75bp again later this month.  While some will draw parallels with the shockingly bad May CPI report, the backdrop is markedly different – commodity prices have fallen sharply, and we’ve seen clearer signs of an economic slowdown, both of which will contribute to weaker price pressures ahead. That, in turn, should help to contain expectations that Fed officials will opt for an even larger 100bp hike.