Can inflation keep cooling off this summer?
A key government report on Wednesday morning will give people a window into whether the Federal Reserve’s 10 interest-rate hikes since last year were enough to keep nudging inflation lower or whether more hikes are needed.
The consumer price index, or CPI, has tumbled from its June 2022 peak of 9.1%, which was the highest yearly inflation rate in 40 years. This May, CPI had dropped to 4%, but it was still double the Fed’s preferred target of 2%. More concerning for the central bank is that a measure of inflation that excludes volatile food and energy costs and is seen as a more accurate reflection of inflation, is still lingering around 5%.
If June’s inflation numbers remain high, it may signal the Fed has more hiking to do. San Francisco Fed President Mary Daly and Cleveland Fed President Loretta Mester separately said this week that they anticipate more increases are needed to tame inflation, which has proven to be more persistent than predicted.
When is the CPI report due?
June CPI data are scheduled to be released at 8:30 A.M. Eastern Time on Wednesday.
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What do economists expect in the details of the CPI report?
- Energy: headline CPI will benefit from favorable year-over-year comparisons, given a surge in energy prices last year, Bank of America economists wrote in a note.
The worst of high gasoline prices “is in the rear-view mirror,” said Mark Hamrick, Bankrate’s economic analyst. The national average for gasoline is running at about $3.50 a gallon, little changed over the past month and down more than $1 from a year ago and from the national average peak of just above $5 a gallon in mid-June 2022, AAA said.
- Used cars:surprisingly strong so far this year, used car price increases are expected to slow. Deutsche Bank economists still expect used car prices to have eked out a small gain in June, but prices should return to being a drag on inflation in the second half of the year. The Manheim Used Vehicle Index dropped 4.2% in June for the biggest monthly decline since April 2020, and that index normally lags the CPI used car component by two months, Deutsche Bank economist Jim Reid said.
- Groceries: Online grocery prices rose 7.6% in June from a year earlier, marking “the ninth consecutive month where year-over-year price increases for groceries have decelerated from September 2022’s record high 14.3% gain,” according to Adobe’s report on Tuesday covering online prices in June.
- Food prices: Overall food prices, which include food away from home (think restaurants) are expected to inch higher. Bank of America economists forecast food inflation up 0.1% in June from May, “owing to ongoing price increases in food away from home inflation given the lagged effects of strong wage growth. That said, there is some evidence that dining out demand is softening as seated diners, according to OpenTable, are down relative to last year.”
- Shelter costs, including rent and home prices: Morgan Stanley sees prices rising 0.49% in June from May. Bankrate’s Hamrick notes national median rents fell in May for the first time in at least three years, and national home prices in April tracked by S&P Case-Shiller fell from year-ago levels for the first time since 2012.
- Services, ex-shelter: a key measure that doesn’t fluctuate very often and isn’t easily controlled by the Fed has remained stubbornly high at 4.2% in May from a year earlier. Components include service prices that are regulated (particularly insurance), and services with infrequent price resets (like tuition, medical services, and subscriptions).
“Slowing job growth and wages will be key in lowering this component,” said Andrew Patterson, Vanguard’s senior international economist. “Last Friday’s strong wage numbers don’t yet signal a turn-around for this component.” Average hourly earnings in June 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.
Specifically, transportation and recreational services are expected to have buoyed this component in June. Transportation services rose 10.2% in May from a year ago and are expected to post another gain. “The main driver on transportation services has been motor vehicle repair, and connected with that, higher insurance costs,” said Boston College Economics Professor Brian Bethune.
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.
CPI predictions July 2023
According to surveys of economists conducted by Dow Jones Newswires and The Wall Street Journal., economists’ median forecasts are:
- June CPI up 0.3% after rising 0.1% in May.
- Core CPI up 0.3% for the month versus 0.4% in May.
- Year-over-year CPI is seen rising 3.1% in June, down from 4% in May and the smallest advance since March 2021, largely due to lower prices at the gasoline pump.
- Year-over-year core CPI is expected to rise 5%, the smallest increase since late 2021 and down from 5.3% in May but more than double the Federal Reserve’s 2% goal.
