Disinflation in energy and core goods has been the underlying inflation narrative over the past 18 months, and that continued to be the case in the consumer price index for June.
Declines in gasoline prices, used cars and trucks, transportation and commodities caused a 0.1% decline in the top-line CPI as inflation increased by 3% on a year-ago basis, according to data released by the Bureau of Labor Statistics on Thursday. Core inflation increased by 0.1% on the month and was up 3.3% year-over-year.
This further easing brings the pace of top-line inflation on a year-ago basis below where it was—3.1%—to start the year. In our estimation, that decline strongly implies that the pickup in turn-of-the-year inflation was noise and not signal and that this now opens the road to a near-term rate cut by the Federal Reserve.
Policy implications
We are confident—even if the Fed is not yet ready to acknowledge it—that inflation is on the way back to the Fed’s 2% target and that the central bank is on the cusp of achieving its mandate of price stability.
The road is open to a rate cut and we expect the Federal Reserve to reduce its federal funds policy rate by 25 basis points in September and by another 25 basis points in December.
Should there be further easing in the labor market—which is based on Federal Reserve Chairman Jerome Powell’s recent testimony before Congress—then it will be appropriate to put another 25 basis-point rate cut on the table in December.
The data
The internals of the June CPI data look just as good as the top-line figures. Energy prices dropped by 2% mostly because of a 3.8% decline in gasoline costs.
Transportation prices fell by 1.3% as airfare costs declined by 5% while used car and truck prices fell by 1.5%. Commodity costs declined by 0.4%; excluding food and beverages, they dropped by 0.8%. Education and communications costs dropped by 0.1%.
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Service costs increased by 0.1% and were up by 5% on a year-ago basis. Food and beverage prices advanced by 0.2%, apparel costs were up by 0.1% and medical costs advanced by 0.2%.
Perhaps more important, the June CPI provided a strong sign that the easing in housing inflation, which we have observed in near real-time metrics, is starting to show up in the data.
While it is too soon to declare victory, signs of normalization are welcome as this is the space where the last mile of the inflation fight is taking place.
Housing inflation eased to a 0.2% increase and was up by 4.4% from a year ago. On a three-month average, housing costs increased at a 2.3% pace, all of which will be welcome by policymakers who are looking to relax a policy rate that is far too restrictive.
Shelter costs advanced by 0.2% and were up by 5.2% from a year ago; over the past three months, those costs increased by 3.3%. The policy-sensitive owner’s equivalent rent series increased by 0.3% in June and was up by 5.4% over the past year. Over the past three months, that series advanced by 3.6%.
The takeaway
The road is now open to a rate cut by the Federal Reserve in September. Broad-based core goods inflation, which declined by 1.84% over the past year, along with easing energy and transportation costs all continue be the primary factors behind inflation’s decline from 9.1% in June 2022 to its current 3%.
In addition, the long lags in housing costs, which are because of the way in which the CPI is measured, have given way to an easier pace of owner-occupied inflation.
While we expect that this will play out in the second half of the year in a measured way, this is good news and should underscore growing confidence that inflation is moving back toward the Fed’s 2% target and that the U.S. economy is on the cusp of price stability.
