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June may become the month noted for when inflation turned the corner. Consumer prices rose 0.2% in June at both the headline and core levels, with the core rate the smallest monthly rise in over two years. Inflation is down substantially from a year ago, measuring 3% on headline and 4.8% on core. Both levels are the lowest since 2021 and well off the peak rates from last year. Prices fell or moderated in most categories, including new and used car prices, airfares, apparel and food. Housing accounted for 70% of the monthly increase in CPI, but even those costs are moderating. Shelter prices rose 0.4% in June, half the rate of the increase at the beginning of the year. A closely watched measure of services prices, which strips out energy and housing, was little changed in June from the prior month. However, the Fed-focused gauge decelerated to a 4% advance from a year ago, the smallest increase since late 2021.
While inflation is certainly moving in the right direction, the year-over-year decline may be slightly optimistic due to base effects. June’s data is being compared to a time when inflation was at its highest level in decades, making the slowdown look better than normal. Many economists are refraining from pulling out the champagne just yet to celebrate falling inflation. A resilient labor market, wage gains and a still-spending consumer continue to be strong head winds against inflation falling at the same pace we have experienced in the past year. The Federal Reserve should be pleased with the lower price levels, but a 4.8% rate is not 2%. All bets are on for a 25 basis point rate increase on July 26.
Key Indicators this Week
Beige Book – According to respondents to the most recent Federal Reserve Beige Book, economic activity increased only slightly in late May and June and slow growth is expected to continue. The Beige Book is published eight times a year, ahead of the FOMC meetings, and provides information from a variety of sources, including business leaders, economists and community groups covering all industries across the country. The report said that labor markets were healthy, with a sense that hiring was becoming more targeted and selective. Worker’s wages continued to rise, but more moderately than in the past, the report said. Some respondents added that the labor market has to cool more to bring inflation lower. Federal Reserve District contacts reported some slowing in the pace of price increases in June. Some districts reported consumers had grown more sensitive to higher prices, limiting which firms could pass along input cost increases. Lending activity overall continued to soften.
Consumer Sentiment – Consumers are feeling the most optimistic about the economy and their financial situation in almost two years. The University of Michigan consumer sentiment jumped 8.2 points to 72.6 this month, the biggest monthly gain since 2006. “The sharp rise in sentiment was largely attributable to the continued slowdown in inflation along with stability in labor markets,” said Joanne Hsu, director of the survey. Short-term inflation expectations ticked higher in early July to 3.4% from 3.3% a month earlier. Survey respondents see costs rising 3.1% on an annual basis over the next five to 10 years. This could account for the improvement to current buying conditions for durable goods, which jumped to the highest level in two years.
Sarina Freedland – Senior Investment Officer
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