- July 20, 2023
- At 3%, CPI is now just one-third of where it peaked a year ago. Inflation is slowing across a growing number of categories, lessening the pressure on the Fed to keep hiking.
- As the year-ago comparisons become tougher, the improvement in the headline inflation could stall, but the moderation in core inflation could accelerate, driven by lower used-vehicle prices and further easing in housing costs.
- The Fed will likely still hike rates again this month, but the case for further tightening weakens.
There was little debate about what drove headlines and financial markets last week. Both stocks and bonds jumped as investors cheered the sharp deceleration in inflation (both in the consumer and producer prices), which provides some breathing room for the Fed. Exactly one year from the inflation peak, the headline consumer price index (CPI) has been cut by more than two-thirds, solidifying disinflation as the key theme for the economy and the markets this year.A lot to like in June's CPI when looking at the details
Headline inflation for June came in at 3%, cooler than expected, and sharply lower from the previous month's 4% reading. This is the slowest pace in more than two years and the 12th straight month of improvement since inflation peaked in June of last year at 9.1%. Excluding food and energy, CPI rose 4.8% from a year ago, the slowest since October 2021, but still way above the Fed's target1
A look under the surface reveals that inflation is slowing across a growing number of categories, making the June reading likely a pivotal one in helping shape views about how far the Fed must push.
Sources: 1. Bloomberg
- Goods – Even with only a modest drop in used-vehicle prices, goods inflation declined 0.1% month-over-month. The good news here is that based on timely industry data, used-car prices will likely come down more. The Manheim Used Vehicle Value Index, which tends to lead the used-car price component of the CPI by a couple of months, fell 4.2% in June from the previous month and 10.3% from a year ago.
- Shelter (housing) – Housing was once again the largest contributor to the increase in core CPI, but the June monthly rise was the smallest increase in rents since the end of 20211.
- Services excluding shelter – This "supercore" measure that the Fed has highlighted, which is largely a function of the labor market, continued to improve in June, falling to 4%, also the smallest increase since December 20211.