Consumer price inflation was reported above expectations at a 5.4% year-over-year rate. So why did the 10-year Treasury yield close lower for the week at less than 1.3%?
As measured by CPI, consumer price inflation was reported above expectations at a 5.4% year-over-year rate. The June inflation reading is the fastest pace since it reached 5.6% in July 2008. In addition, June retail sales were above estimates and bounced back from the May decline despite the hangover from the March stimulus-induced spending binge. This level of consumer spending supports a second-quarter U.S. GDP growth rate of over 7%. So why did the 10-year Treasury yield close lower for the week at less than 1.3%? This 10-year yield is down from greater than 1.7% in March. The most significant piece of the puzzle is that some components of the inflation reading are abnormally high due to the low prices during Covid and supply chain disruptions. These conditions are almost sure to pass as supply, and year-over-year comparisons normalize. For example, car rental and used car prices were 88% and 45% higher year-over-year, respectively. It seems likely that June will be the peak year-over-year rate. Removing the distortions in the year-over-year numbers due to low prices during the Covid lockdowns still leaves CPI running at a 3.3% annualized rate and commodity prices rising at an 11% annualized rate since December 2019. The Atlanta Federal Reserve measure of Sticky CPI, which attempts to remove the noise and measure structural inflation pressures, was 2.
