More Good Inflation News for the Fed to Consider

But concerns remain about the details and things are unlikely to be as promising next month.

The news that the consumer price index fell 0.1% rather than rising by the same amount according to the median economic forecast collected by Dow Jones is welcome news.

The June CPI year-over-year was 3.0%. The median forecast was 3.1% and the May figure was 3.3%. The core CPI, excluding energy and food to reduce volatility, was 3.3%. The forecast was 3.4%, also in line with the May figure. This was the smallest 12-month increase since April 2021.

The Bureau of Labor Statistics, which compiles CPI data, said a 3.8% drop in gasoline prices more than offset an increase in housing prices.

There is no doubt that the numbers are good, even though the inflation measure on which the Fed bases its policy decisions is the personal consumption expenditures (PCE) price index. However, it does factor in the CPI and the next PCE number may be close to the one posted by the CPI.

But the path forward has become more complex. In response to questions during his testimony before Congress, Fed Chairman Jerome Powell said: “The job is not done on inflation, we have more work to do there. But at the same time, we have to be attentive to the state of the labor market.”

About 69% of GDP is consumer spending. This percentage needs to be widely distributed because the wealthiest people cannot consume or spend enough to keep the economy afloat. Unemployment hit 4.1% last month. Average year-over-year hourly earnings growth, while still slowing since March 2022, remains at a rate close to 3.9%, about 80 basis points higher than before the pandemic.

The reaction has been generally positive. Nationwide chief economist Kathy Bostjancic called the news “very good” in an email. She thinks the Fed will be able to start cutting interest rates in September, getting 50 basis points of cuts by the December meeting.

In a note, BMO Economics echoed the sentiment, saying the report left the door “wide open” for a rate cut in September, as the report showed that “consumer inflation has quickly resumed its downward trajectory.”

Oxford Economics also noted that the results support a rate cut by the Fed in September. However, they also said that the decline in CPI between May and June will not continue. They caution against reading too much into the June data, as it is unlikely to be a new trend. The monthly data are seasonally adjusted, and the adjustment factors had a larger effect than expected. This will not be the case in July.