A year after U.S. inflation hit a 40-year high of 9.1%, it has fallen by about two-thirds. But bringing down annual consumer prices increases the rest of the way — to the more normal 2% level sought by federal policymakers — is expected to be a tougher slog.
Inflation cooled for a 12th straight month in June as more modest grocery price increases partly offset a rebound in gasoline costs and still hefty rent hikes. Core inflation, which the Fed watches more closely, eased more than expected.
Consumer prices overall increased 3% from a year earlier, down from 4% in May, according to the Labor Department’s consumer price index. That’s the smallest yearly increase since March 2021. On a monthly basis, prices rose 0.2% following a 0.1% increase in May.
What is the difference between CPI and core CPI?
Core prices, which exclude volatile food and energy items and better reflect longer-term trends, have been tougher to subdue. They rose by a smaller-than-expected 0.2% after a three-month spurt of slightly stronger gains. That pushed down the annual increase from 5.3% to 4.8, the lowest since October 2021.
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Broadly, the inflation picture has been mixed. Prices for used cars and other goods have been inching up more slowly or even falling as pandemic-related supply chain troubles have eased. But the cost of services such as haircuts and auto repairs have continued to advance crisply as wages have climbed amid COVID-induced labor shortages.
How much longer will the Fed raise rates?
Despite the significant easing of core inflation, most economists reckon it won’t be enough for the Federal Reserve, which watches that key price measure more closely. As a result, forecasters expect the Fed to raise interest rates again this month after pausing in June to assess the economic impact of its aggressive hiking campaign since early 2022. But the pullback in core price increases could prompt the Fed to hold rates steady the rest of the year.
What is the outlook for gasoline prices?
Gas prices rose 0.8% in June but are down 26.8% from a year earlier. Pump prices have been volatile but stayed relatively low amid lingering recession fears that have curtailed global oil demand and prices. Nationally, regular unleaded gasoline averaged $3.54 a gallon Tuesday, up from $3.59 a month ago but down from a peak of $5 in June 2022.
So why is CPI important?
The Federal Reserve makes interest rate decisions based on achieving its dual mandate of price stability and maximum employment. The Fed looks at CPI as one measure to gauge if prices are “stable” even though its stated inflation goal is PCE around 2%.
“CPI probably gets more press, in that it is used to adjust social security payments and is also the reference rate for some financial contracts,” the Cleveland Fed said.
The Fed’s next policy meeting ends on Wednesday, July 26. That afternoon, the Fed will announce its interest rate decision. Most economists expect the Fed to raise rates by a quarter point to bring its short-term benchmark fed funds rate up to a range of 5.25% to 5.5%.
Is CPI the only measure of inflation the Federal Reserve considers?
No. Actually, the Fed’s preferred inflation gauge is the Personal Consumption Expenditures price index (PCE) from the Bureau of Economic Analysis. PCE also is broken into headline and core but measures a different basket of goods and services and includes a wider group of people surveyed.
PCE measures price changes for all direct and indirect consumer consumption, not just literally what urban households are paying out of pocket like in CPI. For example, CPI would only capture what urban households pay out of pocket for medical expenses, but PCE includes costs covered by employer-provided insurance, Medicare, and Medicaid.
Also, PCE accounts for substitutions. “Thus, if the price of bread goes up, people buy less bread, and the PCE uses a new basket of goods that accounts for people buying less bread,” the Cleveland Fed said. “The CPI uses the same basket as before.”
CPI tends to run hotter than PCE.
Stock futures: How are markets trading before the CPI report?
Futures tied to the broad stock market gauge, the S&P 500 index, were up 0.16% at 7:21 AM ET, while futures connected to the blue-chip Dow were up 0.09% and the tech-laden Nasdaq-100 traded at 0.21%.
The 10-year Treasury yield was up 3.96%.
What is core CPI?
The consumer price index, or CPI, measures the average change over time in the prices paid by consumers for a variety of different consumer goods and services, according to the U.S. Bureau of Labor Statistics. Core prices exclude volatile food and energy items and generally provide a better gauge of longer-term trends.
Fed rate hike: If inflation’s easing, why does the Fed keep raising rates?
The Fed may be afraid inflation isn’t cooling fast enough. The labor market is weakening, but not enough to lower CPI’s services rate and achieve the Fed’s 2% goal.
Last month, the economy added 209,000 jobs and the jobless rate fell to 3.6%. Average hourly earnings rose 12 cents to $33.58, nudging up the yearly increase to 4.4% from 4.3% and way above the 3.5% or lower that the Fed sees as aligning with its 2% inflation target.
It’s important for the Fed to lower inflation because as it has said, “higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes.”
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What is CPI and what is core CPI?
CPI, short for the consumer price index, is an inflation gauge prepared by the Bureau of Labor Statistics each month. It measures the average change over time of what urban consumers pay for a market basket of consumer goods and services.
There are two main parts to CPI:
- Headline, or overall, CPI
- Core CPI, which excludes the volatile energy and food sectors
“Over the short term, the core measure may give a more accurate reading of where inflation is headed, but people do buy food, fill up their gas tanks, and heat their homes, so headline inflation more accurately represents people’s actual expenses,” according to the Cleveland Federal Reserve..
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