Inflation cools

The consumer price index (CPI) edged up 0.2% in June, after rising only 0.1% in May. That translates to a 3.0% increase from a year ago, the lowest since March 2021, when we were just emerging from the deflation of the pandemic in March 2020. 

Food prices at the grocery store continued to moderate, coming in flat for the month. The prices of proteins – eggs, meats and pork – all fell. Egg prices have erased much of the surge we saw when an outbreak of the bird flu pushed prices to $4.82 per dozen in January. They were at $2.21 per dozen in June. That is only seventy-six cents more than they were in February 2020.

Prices at the gas pump edged up slightly during the month but plummeted relative to a year ago. The average price for a gallon of regular was $3.57 in June, down nearly 30% from the peak of $4.93 a year ago but still more than a dollar a gallon above pre-pandemic levels. That is the largest year-over-year drop in gasoline prices since the onset of the pandemic in February 2020. 

Core inflation edged up 0.2% in June, half the pace of May and the smallest monthly increase since August 2021. That translates to 4.8% on a year-over-year basis, its lowest level since October 2021. The release of that data in November of 2021 was one of the factors that helped members of the Federal Reserve to realize the inflation we were enduring was more persistent than they hoped. They were late on that front.

The shelter component slowed to a 0.4% pace in June, after rising 0.6% in May. That is half the pace of the start of the year and lags the actual drop in rents we are seeing in the high frequency data. We are expecting rents on multifamily properties to decelerate and even drop in the months to come as a record backlog of supply starts to come online.

New vehicle prices were unchanged but used vehicle prices finally fell slightly. Larger declines are in the pipeline. Monthly payments on new and used vehicles have skyrocketed over the last year along with the cost of vehicle insurance. Extreme weather events and the damage they cause, coupled with the larger losses associated with larger vehicles and electric vehicles, which do a lot more damage, are putting upward pressure on insurance costs. 

The super core services component of CPI (excluding energy and shelter), which the Federal Reserve tracks closely, was unchanged in June and up 3.9% from a year ago. That is the lowest year-over-year pace since December 2021, but still nearly double the Federal Reserve’s 2% target. 

More importantly, super core decelerated to a 2.9% annual pace in the second quarter, after rising at a 4.8% pace in the first quarter. That is the slowest annualized pace since the first quarter of 2021 when it was 2% and is extremely welcome news to the Fed; it suggests the slowdown in inflation may have legs to it. 

Much of the service sector linked to travel and tourism saw an easing of prices over the month. Accommodation costs away from home – rental car rates and air fares – all fell during the month. Much of the travel binge showed up in July, with a sharp increase in travel abroad. This exports some of the inflation in the service sector to other countries. 

Food at restaurants and personal care services were outliers. They both increased in price during the month. Food at fast food restaurants increased faster than food at full-service restaurants. 

It is important to note that medical services and airfares are measured differently in the personal consumption expenditures (PCE) index of inflation and will likely come in somewhat hotter in June. However, the trend in core services is expected to improve there as well for the month. 

Is it enough of a cooling for the Fed to stop rate hikes? Not likely. They have been fooled that inflation was decelerating in the past and do not want to repeat that mistake. That means they move forward with a hike in July, although the chance of dissent is rising. President Austan Goolsbee of the Chicago Fed was one of the two who did not expect additional rate hikes in 2023 at the June FOMC meeting.