On July 11, the Bureau of Labor Statistics reported that Consumer prices dropped 0.1%. In the 12 months through June, the CPI climbed 3.0% and followed a 3.3% advance in May
Ryan Sweet, Chief US Economist at Oxford Economics offers the following analysis.
The decline in the consumer price index between May and June won’t stick but it strengthens the case for the Federal Reserve to begin cutting interest rates in September, particularly as the labor market has softened. The Fed is attentive to the risks of keeping interest rates too restrictive for too long and the better news on inflation over the past couple of months should strengthen their confidence that inflation is moving back toward their objective.
The improvement on the inflation front recently is good news for growth in real disposable income, which matters for consumer spending. Real consumer spending hit a lull in the first half of this year as growth in real disposable income slowed noticeably because of the pickup in inflation. This appears to be flipping and will support gains in real consumer spending, supporting our forecast for GDP growth to pick up following a disappointing first half.
Still, we caution about reading too much into the decline in the CPI in June and don’t believe that this is the new trend. The seasonal adjustment factors appear to have been a larger drag on the headline and core CPI in June than we had anticipated. A large decline in gasoline and airfares also contributed to the decline. These prices are volatile and with oil and jet fuel prices edging higher in July, this support is flimsy.
There were encouraging signs on shelter inflation, which is typically sticky. Tenant rents and owners’ equivalent rent both posted their smallest m/m increases since August 2021. Some of the improvement in the shelter components was likely payback for an unusual jump in OER in the Northeast in May. The rise last month was attributable to a 1.8% jump in the New York City metropolitan statistical area, the largest monthly gain since February 1994; a small number of quoted rents in the NYC area increased sharply in May, leading to this extreme movement. Separately, the core services CPI excluding shelter edged lower between May and June, which is welcome news for the Fed.
Turning to July, the CPI will be a little less friendly for both the consumer and the Fed. Gasoline prices rose early in July following global oil prices and seasonal demand higher, which will boost the CPI for motor fuels. Warmer than normal temperatures likely will put upward pressure on the CPI for utilities but this has a fairly small weight in the headline CPI but it could still be enough to move the needle some in July. The seasonal adjustment factors become less favorable for the core CPI in July, but this will also be a theme in August.
