The Consumer Price Index (CPI) rose 0.2% month-on-month (m/m) in June, a tick below expectations. On a 12-month basis, CPI slipped to 3.0% – its slowest pace since March 2021 – and well off its peak of nearly 9% last June.
- The monthly uptick in headline inflation was driven by higher energy costs (+0.6% m/m), including an uptick in gasoline (+0.8% m/m) and energy services (+0.4% m/m). Food prices rose a modest 0.1% m/m and have slowed to 5.7% on a year-over-year (y/y) basis.
Excluding the direct effects of food and energy, core inflation rose 0.2% m/m – also coming in a hair below expectations. The 12-month change on core edged lower by 0.5%-pts on the month, falling to 4.8%, while the three-month annualized change slipped to 4.1%.
Price growth across services rose 0.3% m/m – a deceleration from the 0.4% m/m gains seen over the three-months prior. Core services are up 6.2% relative to June 2022.
- A major contributor to the price growth in services remains rent, with both owners’ equivalent rent (OER) and rent of primary residence (RPR) notching sizeable gains of 0.5% m/m. That said, the much-anticipated slowing in shelter costs now appears firmly intact. Over the last three months, OER and RPR have averaged gains of 0.5% m/m, down from the 0.7% m/m increase seen over the 12 months ending in March.
- Price growth across non-housing services declined by 0.1% m/m, with the weakness concentrated in lodging away from home (-2.0% m/m) and education & communication services (-0.3% m/m). Recreational services (+0.5% m/m) was the only sub-category to report an acceleration last month.
Core goods prices (-0.1% m/m) also declined in June, snapping what had been three consecutive months of gains. Prices across household furnishings (-0.3% m/m), transportation (-0.2% m/m) recreational goods (-0.4% m/m) and education & communication goods (-0.1% m/m) were all lower last month.
Key Implications
Headline inflation has fallen sharply over the past year, with prices up just 3% (or roughly a third of the price growth) relative to June 2022. The core index has been much slower to come down, though encouraging signs are starting to emerge. Shelter costs – a key contributor to price growth through this cycle – have definitively rolled over, while goods have (again) become a source of deflation. We are even starting to see some easing in price pressures across the stickier and more labor-intensive service component of inflation, with the 12-month annualized change on non-housing services falling to 3.9% – the slowest pace of growth since December 2021.
Inflation is moving in the right direction, but progress should not be confused with mission accomplished. Core inflation is still running at a multiple of the Fed’s 2% inflation target, while last week’s employment data showed that the labor market continues to exude a surprising degree of resilience. Another 25 basis-point rate hike at FOMC’s upcoming July 25-26th meeting seems inevitable, with policymakers likely to maintain a tightening bias over the near-term as they continue to monitor incoming data to determine the future path of the policy rate.
