Shock inflation data may push Fed towards historic rate increase: Strategist

Another 40-year high in inflation has may leave no choice for the Federal Reserve but to hike interest rates by a 100 basis points at its July 27 policy meeting, pros are beginning to say.

“I think they’ll definitely go big [on a rate hike]. The key question is how big do they go?” James McCann, Abrdn senior global economist, said on Yahoo Finance Live. “They have signaled 50 to 75 basis points, maybe even now 100 basis points. Historically [100 basis points] is really big. I think it’s on the table. I don’t think I would have it as my base case yet.”

McCann’s comments came just hours after the Bureau of Labor Statistics said Wednesday the June Consumer Price Index (CPI) surged 9.1% year over year, marking a 40-year high.

The print is an acceleration from a hearty 8.6% in May. Economists were looking for an 8.8% increase.

Jaw-dropping increases for goods were littered throughout the report. For instance, the index for butter and margarine skyrocketed 26.3%. Dental services costs increased 1.9% in the month, the fastest pace since 1995. The food at home index rose 12.2%, the largest 12-month gain since April 1979.

Soon after the hot CPI Index read, the expectation for a 100 basis point from the Fed at its next meeting increased to 51% from nearly 8% on Tuesday according to the CME FedWatch Tool. By Thursday morning, traders had priced in a more than 80% chance of a 1% interest rate increase later this month.

By Wednesday evening, economists on Wall Street had begun to shift their forecasts to match market pricing, led by the team at Nomura which became the first to call for a 100 basis point increase this month.

WASHINGTON, DC - JUNE 23: Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System testifies before the House Committee on Financial Services June 23, 2022 in Washington, DC. Powell testified on monetary policy and the state of the U.S. economy.  (Photo by Win McNamee/Getty Images)

Jerome Powell testifies before the House Committee on Financial Services June 23, 2022 in Washington, DC. (Photo by Win McNamee/Getty Images)

“The bottom line is that this report keeps the Fed on its tightening path,” said BofA economist Michael Gapen in a note to clients.

“We continue to expect a 75 basis point hike in July and a 50 basis point hike in September. Today’s report is also consistent with our view that the “inflation tax” will weigh on consumer spending, driving the economy into a mild recession,”

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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