June Inflation Rises by Only 0.2% – Consumers Catch a Break from Price Hikes.
June witnessed the lowest annual inflation rate over two years, attributed to slowing cost increases and favourable comparisons to a period marked by historically high price surges. The consumer price index, a metric gauging inflation, recorded a 3% year-over-year rise, representing the lowest level observed since March 2021.
Every month, the index, encompassing a wide range of goods and services, experienced a 0.2% increase. As per Dow Jones estimates, these figures deviated slightly from expectations, as economists had anticipated a 3.1% annual increase and a 0.3% monthly rise.
The core Consumer Price Index, excluding volatile food and energy prices, displayed a 4.8% year-over-year increase and a 0.2% monthly rise. These figures slightly deviated from consensus estimates, which projected respective increases of 5% and 0.3%. The annual rate of core CPI was the lowest observed since October 2021.
These numbers provide some respite for the Federal Reserve as it aims to curb inflation, which reached an annual rate of approximately 9% in 2022, marking the highest level since November 1981.
George Mateyo, the Chief Investment Officer at Key Private Bank, noted that significant progress has been made on the inflation front. He stated that the latest report affirms that inflation is finally showing signs of cooling down, while economic growth has yet to stall. Mateyo believes the Fed will interpret this report as a validation of their policies that reduce inflation while sustaining growth.
However, central bank policymakers tend to focus more on core inflation, which remains well above the Federal Reserve’s target of 2% annual inflation. Mateyo suggests that this report will unlikely deter the central bank from raising interest rates later in the month.
Federal Reserve officials anticipate a continued decline in the inflation rate, mainly due to anticipated easing costs for shelter, which holds significant weight in the Consumer Price Index (CPI).
However, the shelter index experienced a 0.4% increase last month and rose by 7.8% annually. The Bureau of Labor Statistics revealed that this monthly gain accounted for approximately 70% of the overall increase in the headline CPI.
Lisa Sturtevant, Chief Economist at Bright MLS, pointed out that housing costs contribute significantly to the inflation landscape and are not showing significant declines.
She highlighted that the Federal Reserve’s rate increases, intended to reduce housing demand, have also resulted in limited supply, causing homeowners to hold onto their properties instead of listing them for sale.
Historically low-interest rates during the pandemic, followed by rapid rate increases, have impacted both demand and supply in the housing market.
The financial markets responded positively to the report, as futures tied to the Dow Jones Industrial Average surged nearly 200 points. Additionally, Treasury yields experienced a widespread decline.
Traders in the market are still factoring in a high likelihood of the Federal Reserve implementing a 0.25% rate hike during its upcoming meeting on July 25-26. However, market pricing indicates that this could be the final rate increase as officials pause to allow the previous series of hikes to have their desired impact on the economy.
Initially, when inflation began to accelerate in 2021, Fed officials and most economists on Wall Street believed it would be temporary or transient, gradually fading as specific factors related to the COVID-19 pandemic subsided. These factors included a surge in demand for goods over services and supply chain disruptions causing shortages of critical items like semiconductors.
However, as inflation proved more persistent than expected, the Federal Reserve initiated a series of 10 rate hikes since March 2022, raising benchmark rates by five percentage points.
Interestingly, despite a 0.6% increase in energy prices for the month, the overall rise in the headline CPI remained modest. This was partly due to the energy index experiencing a significant decrease of 16.7% compared to the same period last year, which was characterized by gasoline prices reaching around $5 per gallon.
In June, food prices witnessed a minimal increase of just 0.1% compared to the previous month. Additionally, used vehicle prices significantly contributed to the earlier inflation surge in 2022, which declined by 0.5%.
Furthermore, airline fares experienced a notable drop of 3% every month and are now down by 8.1% annually.
The easing in the Consumer Price Index (CPI) positively impacted workers’ paychecks. Actual average hourly earnings, adjusted for inflation, rose by 0.2% from May to June, and on a year-over-year basis, they increased by 1.2%. It is worth noting that during the peak of the inflation surge in June of the previous year, worker wages consistently lagged behind the rising cost of living.
