Since the end of the Federal Reserve’s interest-rate-hiking campaign, Chairman Jerome Powell has reiterated that consecutive data releases showing inflation nearing the Fed’s two percent target would be required for a rate cut to be considered. rennie intelligence has echoed as much, citing the need for “consecutive meaningful decelerations in inflation” per the monthly Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) price index releases throughout the year. After both measures revealed that inflation had cooled back in May, this morning’s CPI announcement from the Bureau of Labor Statistics (BLS), which showed inflation edging lower in June, truly marks the first time that consecutive meaningful decelerations have taken hold.
After the CPI was unchanged between April and May, it declined in June, falling 0.1% month-over-month. This not only beat expectations (as economists had forecasted an increase of 0.1% on the month), but also marks the first significant decrease since May 2020 (the CPI did decline in July 2022 by 0.006%). On a year-over-year basis the CPI was up 3.0%, which was below economists’ forecasts of 3.1%, and represented the lowest such increase since March 2021.
Core CPI, which excludes volatile food and energy costs, was cooler than the expected 0.2% increase, rising 0.1% on the month and registering its lowest such increase in over three years. Compared to June of last year, the core CPI was up 3.3%, below the forecast of 3.5%, and its lowest annual increase since April 2021.
Within the CPI measure, energy costs fell 2% between May and June, with motor fuel realizing a decrease of 3.7% (and gas prices falling 3.8%). Commodities (less food and energy) fell 0.1%, with used cars and trucks having a notable decrease of 1.5%. The other two expenditure categories, food and services (less energy), both increased between May and June by 0.2% and 0.1%, respectively. Included as part of the services (less energy) category are the much-discussed stubborn shelter costs, which showed measurable signs of cooling in June. On a month-over-month basis, shelter costs rose 0.2%, the lowest such increase since January 2021 and, compared to last year, they rose 5.1% (the lowest such increase since March 2022).
This latest release from the BLS is encouraging news for consumers, who have been fighting with an inflation rate consistently above the Fed’s two percent target for over three years. It is also welcome news for the Fed itself, which was awaiting consecutive releases that provide them the confidence to cut interest rates that continue to remain at a 23-year high. After today’s news, the CME Group’s FedWatch Tool shows 85% of investors pricing in one rate cut at the Federal Open Market Committee meeting in September (with just shy of 9% pricing in a rate cut at this month’s meeting).
As discussed in the introduction, following May’s CPI and PCE data showing inflation cooling, June’s release supports the possibility of an emerging trend. If this trend is to materialize—and the Fed ultimately decides to cut in September—it will be welcome news for those who have been weary of listing their home (see: the “lock-in effect”) and those purchasers who have been sidelined in this challenging interest rate environment.
