The latest inflation numbers indicate that while inflation is still higher than desired, it has reached its lowest rate in two years.
Wednesday’s Consumer Price Index (CPI) report shows that overall CPI increased by 0.2 percent in June compared to May, and by 3 percent compared to June of the previous year. This represents a significant decline from the 9.1 percent annual rate of inflation observed in June of the previous year.
Core inflation, which excludes food and energy prices due to their volatility, remains slightly higher at 4.8 percent year over year. However, this is still the lowest core inflation has been since October 2021.
The report suggests that inflation is slowing down, particularly in areas such as gas and food prices. Economists believe that this trend will continue in the coming months as the supply shocks caused by the pandemic and other factors fade away.
While the CPI report is positive, economists do not expect it to halt the Federal Reserve’s interest rate increases. The Fed is likely to proceed with another rate hike later in the summer as it aims to bring inflation down to the target rate of 2 percent.
“Inflation is throttling back, particularly for staples such as gas [and] food, and this should continue in coming months,” Moody’s chief economist Mark Zandi told Vox.
WHOA! Headline CPI rose by only 0.2% in June, and is now down to only 3.0%. That's back to the March '21 level.— Justin Wolfers (@JustinWolfers) July 12, 2023
More importantly, core CPI rose only 0.2%, and is up 4.8% over the year.
BOTH measures are a good bit below expectations.
Inflation is returning to normal rates.
However, the report and other recent developments indicate that the US economy may avoid a recession, and there could be more aggressive rate hikes in the future.
In terms of prices, the report shows that certain areas like energy and used cars have experienced a decline in prices on an annual basis, while housing costs have continued to rise. Gas prices have significantly decreased compared to the previous year, while grocery prices have seen an uptick year over year, although some items like eggs and dairy have declined compared to prior months.
“Energy prices have definitely come down a lot in absolute terms over the past year,” the Economic Policy Institute’s Josh Bivens told Vox. “Grocery prices have fallen in absolute terms — i.e., not just slower inflation, actual price declines — since March.” Bivens warned he’s unsure if these prices will keep dropping.
What about rent?
“Economists expect rent increases to ease substantially, based on new leases, but that shift has been slow to filter through to existing leases,” USA Today reports.
Regarding interest rates, the expectation is that the Federal Reserve will proceed with an interest rate hike in the coming months, bringing rates to a range of 5.25-5.5 percent. While the lower rate of inflation suggests that the Fed’s rate increases are having an effect, inflation is still not at the desired level.
The Fed has been focusing on core inflation, which remains higher than overall inflation. If inflation continues to decrease, the Fed may consider pausing further rate increases after the upcoming one.
“The quickly moderating inflation and prospects that the Fed is nearly finished raising rates increases the likelihood the economy will skirt a recession,” says Zandi.
State of the economy overall
Overall, the report is seen as good news for the economy, as inflation is moderating and the likelihood of a recession is decreasing. And the strong unemployment rates further support a positive outlook for the economy.
“The quickly moderating inflation and prospects that the Fed is nearly finished raising rates increases the likelihood the economy will skirt a recession,” says Zandi told Vox.