James Knightley, Chief International Economist at ING, notes that U.S. July inflation has surprised on the upside, but they see this more as an unwinding of the strains caused by Covid-19 shutdowns rather than a signal there is a meaningful pick-up in medium-term price pressures.

"US consumer price inflation came in higher than expected in July, posting 0.6% month-on-month gains for both headline and core CPI versus 0.3% and 0.2% respective consensus expectations. This leaves the respective year-on-year inflation rates at 1% and 1.6%."

"After yesterday’s firmer-than-anticipated PPI report there was going to be some upside threat, but the scale of the rise in the core measure is quite a surprise. However, we see this more as an unwinding of the strains caused by Covid-19 shutdowns rather than a signal there is a meaningful pick-up in medium-term price pressures."

"For example, apparel rose another 1.1% after the aggressive discounting of April and May concluded when retailers were desperate for cash. Likewise, transport jumped 2.9% and lodging away from home rose 1.2% (hotels) as people start to move around the country more and firms have a bit more pricing power. Meanwhile, gasoline rose 5.6% MoM, reflecting higher pump prices as a lagged response to the recovery in the oil price and car prices picked up 0.8% MoM."

"With the US Treasury seeking to sell $38bn of 10Y treasuries today and $26bn of 30Y tomorrow, these higher inflation numbers and the recent softer tone to the US dollar supports our debt strategy team's view that we see more curve steepening in the near term. However, we are not fearful of a meaningful rise in inflation over the medium term."