Consumer inflation continued its steady — and encouraging — decrease in June, standing at 3%. That is the smallest 12-month increase since March 2021, according to the Bureau of Labor Statistics’ (BLS) Consumer Price Index (CPI), released July 12.
Investors and analysts were anxiously awaiting the report, some deemed “a turning point,” in the fight against inflation, to look for clues as to what the Federal Reserve’s next moves will be, following a pause in rate hikes at its last meeting.
This latest set of data was lower than estimates, as economists surveyed by The Wall Street Journal estimated that inflation rose 3.1% in June from a year earlier. It is also a notable decrease since May’s 4.9% figure and a huge decrease since the 9.1% of last June, according to BLS data.
Yet, it has a bit more to go to reach the Fed’s 2% target and several Fed officials have been voicing the need for further hikes in the past few days.
What Will the Fed’s Response Be?
Ben Vaske, investment strategist at Orion Advisor Solutions, noted that while today’s CPI shows the used car market has begun retracting from its highs last year, “the core reading remained sticky with housing and transportation services still up nearly 8% year over year, keeping big purchases out of reach for some consumers.”
Core CPI, which excludes food and energy prices, rose 0.2% in June however, and is up 4.8% from a year ago, lower than the estimates of 5% and 0.3%, respectively, according to CNBC.
What Options Does The Fed Have?
Several experts say that the latest report will not sway the Fed’s intention to resume its hikes at its Federal Open Market Committee (FOMC) July 25-26 meeting, with the market pricing a 90% probability for a 25 bps hike, according to Amelia Bourdeau, managing director at Diamond Standard.
“The journey back to 2% core inflation looks to be long,” added Bourdeau.
While experts agree that the Fed will resume its hikes later this month, some, such as Jeffrey Rosenkranz, portfolio manager, Shelton Capital Management, noted that this latest CPI report “was soft across the board and marks an important turning point in the continued fight against inflation.”
“While today’s data is unlikely to push the Fed off of a 25bp hike at their July meeting, it might obviate the need for any further hikes,” added Rosenkranz.
Rosenkranz added that there will be additional data to assess before the September meeting, but this should, at a minimum, lock in a skip in September for even more time to assess the lagged effect of all of the cumulative tightening by the November meeting.
“Core services inflation excluding housing fell below 4%,” he said, adding that given that housing operates with a much longer lag due to the way the data is sampled and collected, this is another comforting trend.
“Average hourly and weekly earnings did show some strength, and the continued tightness of the labor market is really the only thing keeping the Fed on alert,” he added. “The labor market is a lagging, not leading indicator, and early barometers such as large company hiring, temporary workers, and job openings have already rolled over, suggesting the last bastion of strength will soon fall in line as well.”
Should the Fed Continue Its Rate Pause?
Russell added that other categories such as transportation and used-car prices bolster arguments for the Fed pausing hikes soon.
“This is no longer just a commodity-driven story. Slowly but surely the tsunami of inflation is receding,” he added.
Other experts echoed the sentiment. Gargi Chaudhuri, head of iShares Investment Strategy, Americas, at BlackRock, said that she expects further weakness in shelter inflation in the months ahead and believes that this is the start of a multi-month normalization in the disinflation process.
The BLS added that other indexes with notable increases over the last year include motor vehicle insurance (+16.9%), recreation (+4.3%household furnishings and operations (+3.6%), and new vehicles (+4.1%).
While the consensus is that there will be further rate hikes, not everyone agrees that these are necessary.
William J. Luther, director of the American Institute for Economic Research‘s Sound Money Project, noted that while Fed officials have signaled they would raise the federal funds rate target this month, “I think they should reconsider.”
“Fed officials do not need to raise rates further to bring down inflation. They just need to hold rates above neutral and wait for inflation to fall further,” said Luther. “A little patience would go a long way right now. Further rate hikes risk a painful contraction.”
Where is Your Money Going?
The index for shelter was the largest contributor, accounting for a whopping 70% of the overall increase.
Energy and Gas Prices Are Down Year Over Year
The energy index rose 0.6% in June — a 16.7% decrease over the year. Meanwhile, the gasoline index also increased 1% — a 26.5% drop over the year. And the electricity index increased 0.9%, up 5.4% over the year.
Food Costs Continue to Rise
Unfortunately for consumers, food prices were still up 0.1% in June.
The food-at-home index was unchanged, following a 0.1% in May, and 4.7% over the year, while the food away from home rose 0.5% in May.
Food items that increased for the month include fruits and vegetables, which were up 0.1% in June.
On the other hand, the index for meats, poultry, fish and eggs decreased 0.4% in May, as the index for eggs fell 7.3%.
Rent Costs and Home Prices Remain Painfully High
Prices for shelter increased 0.4% the month, increasing 7.8 % for the year, accounting for more than 70% of the total increase in the core CPI, the BLS said. Rent prices increased by 0.5%.
“This report suggests that inflation is easing as the optimists hoped, with shelter costs following the bulls’ script. It’s now easier to anticipate further improvements because of its lagging nature,” said David Russell, vice president of market intelligence at TradeStation.
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