More Good Inflation News for the Fed to Consider
But there still are concerns in the details and things are unlikely to be as promising next month.
The news that the Consumer Price Index shrunk by 0.1% rather than growing by the same amount according to the median economic forecast gathered by Dow Jones is good news.
Year-over-year June CPI was 3.0%. The median forecast was 3.1% and the May figure was 3.3%. Core CPI, without energy or food to reduce volatility, was 3.3%. The forecast was 3.4%, which was also May’s number. That was the smallest 12-month increase since April 2021.
The Bureau of Labor Statistics, which compiles CPI data, said that a 3.8% drop in gasoline prices more than offset an increase in shelter prices
No mistake, the numbers are good, although the inflation metric the Fed bases strategic decisions on is the Price Index for Personal Consumption Expenditures (PCE). However, they do look at CPI and it may be that the next PCE reading will hold close to what CPI is showing.
However, movement forward has become more explicitly complex. In answering questions as his congressional testimony, Fed Chair Jerome Powell said, “The job is not done on inflation, we have more work to do there. But at the same time, we need to be mindful of where the labor market is.”
About 69% of GDP is consumer spending. That has to be broadly based because wealthier people can’t consume or spend enough to keep the economy on an even keel. Unemployment rose to 4.1% last month. Year-over-year average hourly earnings growth, while continuing to cool since March 2022, is still at nearly a 3.9% rate, or about 80 basis points higher than immediate pre-pandemic times.
Reactions overall are positive. Nationwide Chief Economist Kathy Bostjancic in an emailed note called the news another “very good” report. She thinks that the Fed will be able to start lowering interest rates in September, getting 50 basis points of cuts by the December meeting.
BMO Economics in a note agreed, saying that the reading left the door “wide open” for a September rate cut because the report makes the case that “consumer inflation has swiftly resumed its downward path.”
Oxford Economics separately chimed in that the results made a better case for the Fed to cut rates in September. However, they also said that the CPI decline between May and June won’t stick. They do caution against reading too much into the June data, as this probably isn’t the new trend. Month-over-month data is seasonally adjusted, and the adjustment factors had a bigger-than-anticipated effect. That won’t be the case in July.