The Price Is Wrong

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What's going on?

Data out on Wednesday showed that US consumer prices continued to climb by more than expected last month.

What does this mean?

Earlier this week, a report emerged claiming that US consumer prices were 10.2% higher in June than the same time last year. And while it turned out to be a hoax, it certainly seemed plausible enough: the US government has, after all, been downplaying the latest inflation numbers ahead of the real update. It was so plausible, in fact, that stocks slumped following its release.

Fake or not, it wasn’t far off: consumer prices rose 9.1% in June, well above May’s 8.6% and April’s 8.3%. That was mostly down to – you guessed it – energy and food prices, which were 42% and 10% higher than the same time last year. And even though salaries have been rising lately, clearly they haven’t been rising fast enough: the data showed that inflation-adjusted hourly wages fell 3.6% – the biggest drop since 2007.

Why should I care?

For markets: Are stocks about to rally?
Higher prices and lower salaries could lead to a drop in consumer spending, which is bound to be flagged as a concern this earnings season. But Deutsche Bank doesn’t think it’ll lead to another stock market selloff: the bank argues that the writing has been on the wall for a while now. In fact, Deutsche has pointed out that the market has historically rallied during an earnings season that follows a selloff like the one we’ve just seen.

The bigger picture: The almighty dollar.
This data only makes it more likely the Fed will hike interest rates substantially again later this month, which will continue to make the US dollar an appealing prospect for international savers and investors. The ECB’s reluctance to hike rates, meanwhile, is having the opposite effect on the euro. That might be why the euro fell below the value of the greenback for the first time in 20 years on Wednesday.

Originally posted as part of the Finimize daily email.

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