Second Straight Month of Stable Prices Lowers Inflation to 3%
Peter Bernstein, Chief Economist
pbernstein@rcfecon.com, 312-431-1540 x1515
The Current Situation
After showing no change in May, the Consumer Price index fell slightly in June lowering the year-over-year inflation to 3%, the lowest rate since March of 2021. Core prices rose just 0.1% in June, lowering the year-over-year increase to 3.3%, the lowest for this measure since April 2021. Combined with lower inflation as measured by the Fed’s preferred price index (core PCE), the path to 2% inflation is getting clearer and clearer.
The inflation scare from the first quarter of 2024, when the annualized inflation rate jumped above 4%, has passed. Over the past three months, annualized CPI inflation has been less than 1%. A key driver of lower inflation has been a slowdown in the growth of rent and owner’s equivalent rent, both of which rose just 0.3% in June, their lowest monthly increases in nearly three years.
But we are not completely out of the woods yet. While prices of goods and other commodities were lower in June than a year earlier, the prices of services were up 5%. Since services are a larger part of the economy than goods, reaching 2% inflation will likely require additional moderation of wage growth, a key driver of service sector prices. The Fed has targeted 3.5% wage inflation as being an important part of its anti-inflation goal; June’s reading was 3.9%.
Another consideration for the Fed has been unemployment, which has drifted upward to a still-low 4.1% rate in June. Though higher unemployment represents an economic loss, it is remarkable that the economy has withstood 11 Fed rate increases with only a small increase in unemployment.
RCF’s Inflation Scorecard
RCF’s Inflation Scorecard is based on analysis of 20 different price series comprising 98% of the total consumer price index. Each of these price series represents a portion of the CPI based on household spending patterns. For example, food purchased for at-home consumption is about 8.2% of the typical consumer’s budget; it has a weight of 8.17 out of a total index of 100.
RCF Inflation Scorecard: June 2024
Our scorecard presents two metrics to track month-to-month price increases. The first metric is the share of the index for which inflation in the most recent month is rising (greater than the prior month’s inflation) vs. the share of the index for which inflation is falling (lower than the prior month) or prices fell (deflation). In June, 21% of the weighted CPI showed deflation and another 44% showed slowing inflation, evidence that the slowdown in price growth is broad-based and likely to continue.
Our second metric is the share of the index for which the most recent month’s inflation exceeded 0.2%, a monthly rate that corresponds to the Federal Reserve’s target inflation rate of 2% per year. This second measure fell to 50% in June, meaning that half the weighted CPI was above, and half below, the Fed’s target. In other words, the median weighted price increase was what the Fed wants. One dark cloud is that 28% of the weighted CPI showed rising inflation in June, a higher share than in April or May. But overall, the good news (deflation and falling inflation) outweighs the bad news (higher inflation) by more than two to one.
Analysis of Individual Components of the Consumer Price Index
Sources: Bureau of Labor Statistics and RCF Calculations 1. Inflation direction indicates whether monthly inflation in June was higher or lower than monthly inflation in May. Deflation means prices fell in June vs. May.
Highlights:
- Monthly changes provide a better look at recent inflation trends, but year-over-year changes are probably more important to consumers who have been hit with higher and higher prices for more than two years. Fortunately, prices of six of our 20 CPI components were lower in June than a year earlier, including new and used vehicles, and motor fuel.
- Other parts of auto ownership continue to keep inflation higher. Insurance prices were up 0.9% in June and 19.5% compared to a year ago. Maintenance and repair costs were up 6% from a year ago, though the monthly increase slowed to 0.2% in June.
- Food-at-home (a.k.a. grocery) prices rose 0.1% in June and only 1.1% from a year ago. In contrast, food-away-from-home (a.k.a. restaurant) prices rose 0.4% in June and 4.1% from a year ago, reflecting the increase in service sector prices mentioned earlier.
- Finally, it appears that the BLS measures of rent and owner-occupied equivalent rent prices show the slowdown found in other market measures of shelter costs. Both were up 0.3% in June.
- For the sake of argument, it would take three more months of stable prices for year-over-year inflation to fall to 2%. If prices were to increase 0.1% per month, 2% inflation would be reached by the end of the year. Given the lower inflation readings in May and June, either of these outcomes is in sight.
