June's consumer price index showed a 9.1% increase in prices which is the most in 40 years and was above analysts' expectations of 8.8%. The report also undermined hopes that inflation had already peaked and was rolling over based on what we are seeing in many parts of the economy, including some relief in commodity price pressures and a slowing in economic activity in many areas.

However, weakness in these components was offset by strength in 'stickier' components. In many ways, this is the worst outcome as it implies that the Federal Reserve may have to hike for more and longer to fully tamp out inflationary pressures.

This was reflected in the Fed funds futures market which showed the odds of a 75 basis point hike at the July meeting, reaching 100%, while the odds of a 75 basis point hike at the September meeting also increased. Interestingly, the odds of a rate hike cut in Q1 of 2023 also increased.

It was also notable that the stock market was initially down more than 1.5% on the print, however, the bulk of these losses was pared by the close with the market finishing less than 0.5% lower and was even green at mid-day. Longer-term bonds also rallied on the number, indicating that the market continues to look past these numbers and is more focused on the deterioration in terms of forward-looking measures.

In terms of core CPI which excludes food and energy prices, there continues to be some optimism as it came in at 5.9%, down from the peak of 6.5% in March.

This is a source of optimism as energy prices are much lower over the past month after being up 7.5% for the month and 41.6% compared to last year. Gasoline prices were up 11.2% monthly and 59.8% annually.

Weakness in housing is yet to be reflected in the shelter component which was up 5.6% compared to last year. Rents were up 0.8% compared to last month which is the most in 30 years.

Higher inflation and slowing momentum in the labor market are resulting in a loss in real incomes which declined 1% for the month and 3.6% compared to last year.

There are some reasons for optimism as gas prices are down meaningfully over the past month, and the commodities index is lower by 7.3%. Transportation costs have also fallen back to pre-pandemic levels, indicating continued improvements in supply chains.

Now, the major question for investors is less about inflation and more about how much damage will the economy feel as the Fed focuses on bringing it down.