Inflation Suddenly Drops, But There Still May Be More Hikes in the Future

The Consumer Price Index for June is in, and the numbers are exceedingly good compared to those over the last year. Seasonally adjusted inflation was 0.2% in June and 3.0% year over year.

Core inflation, without counting food and energy, rose 0.2% in June. That was the smallest single-month increase since August 2021. The 12-month increase not adjusted result was the smallest since March 2021 but was still at 4.8%.

As has been the case for too long, shelter costs were the largest contributor to inflation, making 70% of the increase and standing at 8.3% for renters. Another “contributing” factor according to the Bureau of Labor Statistics was motor vehicle insurance. Food costs were up 0.1%, a rate increase half that in May — food at home didn’t change, but food prices out of the home increased by 0.4%. The energy index was also worth noting, as it was up 0.6% in June. Apparel, recreation, and personal care prices also rose.

That’s the good news. But does it mean that the Federal Reserve will brush its collective hands and call it a day on the interest rate increase? Not a chance, because of the bad news.

Remember, the Fed has wanted to see consistent and ongoing progress in inflation reduction that they could expect to continue. One of the issues that Gregory Daco, EY-Parthenon chief economist, pointed out on Twitter that the “free lunch is over.”

Inflation comprises many sectors. Some of them have come down sharply and can have an outward effect on overall inflation. For example, in the month-over-month seasonally adjusted inflation, new cars were down 0.5%. Airfares had dropped 0.8%. Daco wrote that “now momentum will have to come from slower core services price momentum,” and these are the stickier parts of pricing.

“The headline is CPI inflation fell to 3.0%. But mostly this is the huge June 2022 # dropping out & what is almost certainly a transitory 17% fall in energy prices over the last yr,” [sic] economist Jason Furman agreed.

The Federal Reserve Bank of Atlanta has its own “sticky-price consumer price index (CPI)—a weighted basket of items that change price relatively slowly.” On an annualized basis, it was up 2.9% in June, following 4.1% in May. But on an unadjusted year-over-year basis, the sticky-price CPI was up to 5.8%.

The Fed will look at multiple data points, as always. And there may be enough information in the current numbers to support their stated intent of additional rate increases this year.

As Steven Blitz, chief U.S. economist at TS Lombard, wrote in a note: “Either the economy is dropping into recession, no more hikes needed, or avoids recession near term, thereby setting up for much higher policy rates (6.5%) to create a broader downturn than the one developing.”