Thoughts

July 12, 2024 | 13:44

U.S. Inflation: Perceptible Progress

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

There is no shortage of superlatives to describe the June CPI report. The stellar details include the first monthly headline drop since the 2020 shutdowns, the tamest core rise (0.06%) since January 2021, a fourth straight decline in core goods prices, a subdued shelter print (finally), and a second straight decrease in ‘supercore’ services prices. Moreover, the softness was widespread, including a fourth straight dive in airfares, a further decline in car prices, and tepid moves in medical care, clothing and recreation. Simply put, inflation took a holiday in June after winding down in May and working overtime earlier this year.

But which is the anomaly—the latest two months whereby the core index rose just 1.4% annualized, or the preceding four when it bounced 4.3%? Most likely the truth lies near the middle (tucked under 3%). However, there is some reason to believe the latest performance is more trend than noise. First, seasonal adjustment may not be adequately accounting for businesses hiking prices after the holiday season rather than the usual discounting. Similar price blips occurred at the start of the previous two years. Second, the milder inflation prints correlate with a recent slowing in economic growth and spending. PepsiCo noted this week that shoppers “have become more price conscious”. Third, lower inflation aligns with a looser labour market, as the jobless rate no longer sports a 3-handle. And fourth, the spike in core prices earlier this year didn’t derail disinflation. As shown in the chart, the 12-month average of monthly core price changes (0.27%) in June is half the peak (0.54%) reached in September 2022, and more than two-thirds of the way back to price stability (0.17%).

A word of caution, though. The June CPI likely overstates actual progress on inflation. A 5% dive in airfares trimmed 0.04% off the headline rate, while a 1.5% slide in used vehicle prices cut 0.03%, and both look to have shaved a tenth from the core increase. Two alternative CPI measures, compiled by the Cleveland Fed to control outlier effects, show more normal increases, with the trimmed-mean index up 0.17% and the weighted-median metric up 0.19%. Moreover, producer price pressures are warming up, with the core index popping 0.4% in June, kicking the yearly rate to 3.0%. Clearly, more inflation data are needed to gain confidence in the outlook.

The next release of the Fed’s preferred measure of inflation, PCE prices, is due later this month. Based on the details of the CPI and PPI reports, headline PCE prices look to fall slightly after holding steady in May, carving three tenths from the yearly rate to 2.3%. Core PCE prices likely held steady, a very rare event outside of recessions and shutdowns, slicing two tenths from the annual rise to 2.4%. The road back to price stability may be bumpy but it’s still heading in one direction.