Stocks weakened following the biggest inflation reading in nearly 13 years.

June Consumer Price Index (CPI) came in at 5.4%, according to the Labor Department's report on Tuesday, which was above analyst expectations of a 4.8% increase. On a monthly basis, June CPI was 0.9% higher than May. Core CPI, which strips out food and energy, also came in above expectations at 4.5%.

One of the biggest debates among market participants is whether the rise in inflation is a new trend or simply transitory. Those in the transitory camp point to the pandemic and its effects on the supply chain as the primary culprits behind the rise in inflation. Therefore, they are not in favor of the Federal Reserve changing policy as they believe that inflation will fall as these issues are addressed.

Another camp believes that the rise in inflation is structural and is a consequence of the sky-high deficits and loose monetary policy. This report provides evidence for both arguments as we have high inflation readings but structurally, most inflation is due to used cars, hotel room prices, and other areas affected by the pandemic.

Most importantly, the Fed and Wall Street are in the "transitory" camp. This is evident from the Fed sticking to its policy, while yields on Treasuries remaining low which is inconsistent with an outlook for higher inflation.

In fact, this report could mark a peak in terms of inflation with the 0.9% monthly gain following May's 0.6% increase. However, one-third of the gain was due to used cars and trucks which saw an increase of 10.5%. A variety of dynamics are leading to rising prices in used cars and trucks. The chip shortage has slowed the production of new cars, while consumers are flush with cash due to the stimulus and increased savings last year. On an annual basis, used car and truck prices have risen by 45%. We had similar dynamics with lumber, but prices are down by more than 50% as demand ebbed with high prices, while mills increased production to take advantage of higher prices.

In terms of the stock market and Fed, the report is unlikely to have a drastic impact. This could change if inflationary pressures start to spread into other categories or if the increase in certain categories continues. However, this seems unlikely as companies and people are incentivized to act in the face of higher prices.