Annual inflation in the US, which was expected to increase by 8.8 percent in June, increased by 9.1 percent, setting a new record. Core inflation recorded a limited decline from 6 percent to 5.9 percent. Volatility increased in the markets after the CPI exceeded expectations.

The Consumer Price Index (CPI) in the US increased by 1.3 percent month-on-month in June, while the annual increase was 9.1 percent, the fastest increase since November 1981.

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In the said period, increases in gasoline, housing and food prices continued to be effective in the rise in consumer prices.

Energy prices rose by 7.5 percent month-on-month and 41.6 percent year-on-year in June. The annual increase in energy prices was the biggest rise since April 1980. Gasoline prices, which are effective in the rise in energy prices, increased by 11.2 percent month-on-month and 59.9 percent year-on-year in June.

The housing index also rose by 0.6 percent month-on-month and 5.6 percent year-on-year in June. In the same period, the food index increased by 1 percent month-on-month and 10.4 percent year-on-year.

Core inflation also outperformed expectations
Core CPI, which excludes volatile energy and food prices, also rose by 0.7 percent mom and 5.9 percent yoy in June, above market expectations.

In the said period, market expectations for core inflation were for a monthly increase of 0.6 percent and 5.7 percent annually. Core CPI increased by 0.6 percent monthly and 6 percent annually in May.

Analysts stated that June inflation, which exceeded market expectations, strengthened expectations that the US Federal Reserve (Fed) would raise interest rates by 75 basis points at the July meeting, while expectations for a 100 basis point rate hike increased to 30 percent.

First market reaction to higher-than-expected US inflation

The Fed is expected to raise rates by 75 basis points on July 27. Markets see the probability of a 75 basis point rate hike in September as 80 percent.

The first reaction of the markets to inflation exceeding expectations is as follows:

US 10-year interest rate exceeded 3 percent.

The US futures market fell around 1 percent.

The dollar index moved to 109 level.

Euro/Dollar tested below 1.

USD/TRY 17.45 and Euro/TRY 17.50 maintained their levels.

Brent Oil was at 98.6 dollars and spot gold at 1,715 dollars.

Will the Fed become more hawkish?

IS Investment International Markets Director Şant Manukyan’s assessment of the Fed’s possible action plan is as follows: “Inflation data could open two doors. The first is a 100 basis point hike at the next meeting. There is still time for the meeting, the market can be prepared. Or the market will prepare for a second 75 basis points at the September meeting. 10-year yields are at 3.05%, but more importantly, fwd breakeven, the index reflecting inflation expectations, is at 2%. So confidence in the Fed continues, this is a very critical point.

If the Fed will hike by 175 or 150 basis points in two meetings, it will see its target rate for this year before the end of the year. So the danger is not that the Fed will hike 75-75 or 100-75, but that there is a possibility that the Fed will hike to a higher level than it had previously envisaged. As you know, the Fed basically has two mandates: employment and inflation. Even if the latest data shows weakness, the Fed is not going to take it seriously. So it thinks there is room to be more aggressive. That means higher real interest rates and lower asset prices. That’s what we need to watch.”