Fed Spots Light At Tunnel’s End In Benign US CPI Report

Drum roll!

The most important US CPI report since… well, since last month’s report, showed consumer price growth across the world’s largest economy was slower than anticipated in June.

In a development that’ll almost surely be greeted warmly by market participants eager to fade last week’s bond selloff and jump aboard the equities bandwagon, core prices rose just 0.2%, the BLS said Wednesday. Consensus expected 0.3%.

The unrounded print was 0.157%, the smallest monthly gain since February of 2021.

The YoY pace decelerated to 4.8%, still far too high but lower than the 5% consensus expected and the first four-handle read on core price growth since November of 2021.

The headline gauge likewise undershot expectations, rising 0.2% in June from May, and just 3% on a YoY basis.

Most of what matters appeared to move in the right direction. The shelter gauge rose 0.4%, tied for the slowest monthly increase of 2023. Shelter accounted for 70% of the all-items increase, underscoring the notion that if shelter prices cooperate as expected+, “official” inflation in the US could move decidedly lower in the coming months.

The MoM OER print was the coolest since December of 2021. On a YoY basis, OER moved lower for a second month. The long-awaited “catch down” is finally proceeding, as shown above.

Used vehicle prices (which are broadly expected to fall in line with a series of declines+ on a key wholesale price gauge) retreated. It was the first monthly decline since March. Food at home prices were flat from May. The YoY pace of grocery inflation is now down to 4.7%, the lowest since September of 2021. Airfares tumbled more than 8%.

The energy gauge rose, but the underlying components were mixed. The gasoline index fell nearly 27% YoY.

Most importantly (and I’m indulging my penchant for burying the lede), one of the two CPI-derived supercore measures fell on a MoM basis. Core-CPI services excluding rent and OER posted a marginal monthly decline. Core-CPI services excluding shelter rose just 0.09%. The Fed tracks the PCE-derived measures, which can differ, but these prints were benign. We now have evidence to support the contention that supercore prices really are starting to recede.

It was (very) difficult to put a bearish spin on the numbers. And I’m someone who can put a bearish spin on just about anything. At the risk of overstating the case, the June US CPI report might fairly be described as the first definitive sign of progress towards the Fed’s goals.

“June’s inflation figures finally offered confirmation that the downward trajectory has taken hold,” BMO’s Ian Lyngen remarked, noting that two-handle headline CPI may be imminent. Wednesday’s data, he went on to say, “has confirmed the effectiveness of [Jerome] Powell’s actions and offers evidence that inflation’s period of stickiness is coming to an end.”

July’s hike, which was still priced as a lock, will likely be of the dovish variety. Another CPI report like June’s, and it’ll probably be safe to declare the Fed done.

Cue a procession of angels playing trumpets. Or something.


 

Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

11 thoughts on “Fed Spots Light At Tunnel’s End In Benign US CPI Report

  1. The FOMC was slow in recognizing inflation as a problem, but when it did it moved decisively. The June report doesn’t take a .25 hike in July off the table, but it certainly gives Chair Powell and members of the board additional optionality. I’ve been a Powell fan for a while now; the June report does nothing to change my opinion of his leadership.

    1. Given the lags between rates and inflation, he/the Fed may not have had much to do with the topping off of inflation we’re seeing…

  2. Disinflation is locked in for awhile. The Fed needs to leave data dependency behind and look through the front windshield not the rear view mirror now. If they look through the front window they will make the June hike their last and stop messing with the balance sheet and end QT before they have a liqudity problem in the financial system. Not saying they need QE, just leave the balance sheet tool in the shed. If inflation comes back, raise rates. If not and the economy slows down they will have 5% to play with and they can cut rates. The balance sheet should be saved for emergencies in either direction.

  3. Is this the moment in the horror movie where we all think the bad guy has been vanquished only to find out there is an even bigger and badder guy still out there? Is that bigger, badder guy stochastic inflation? Some geopolitical event? An actual recession? It just seems like things are quiet, too quiet.

    1. Will the next 50 years be better or worse for mankind than the last 50 years?

      I think better- as physical living standards, in aggregate, continue to rise across the global population and humans continue to innovate towards a clean and unlimited power source.

      I never forget that $100,000 invested in the S&P 500 in 1970 is worth about $22M today versus the fact that $100,000 in 1970 dollars is equivalent to about $789,000 in today’s dollars (3.97% average inflation).

  4. Not surprised about the downward sticky shelter index. My local Quick Trip changes gas prices every day or two. Sadly, we can’t expect the same for shelter. For apartment dwellers, rising property taxes and high rates will mean developers/landlords will have to keep rents high enough to repay these expenses. While individuals can deduct at least some of their taxes and interest from their income, they have no recourse with rising rents. It’s the landlord that gets the deductions, with none of the “Trump tax cut” foolishness.

    1. Here in CA, property taxes don’t rise (much), and if you had a fixed rate loan on your rental property, your loan costs have stayed the same while you’ve been raising the rent on your tenants. Rents have gone through the roof, and it’s mostly profit for the landlord. Same as for Pepsi Co. There is room for rents to drop without landlords going bankrupt, a lot of room. But it would probably take an exodus of a couple of million Californians to Texas for that to happen.

      1. My CA property taxes actually went down by almost 13% (didn’t even have to submit an appeal)! I may or may not be a bag holder, but I’ll take what I can get.

NEWSROOM crewneck & prints