Consumer Price Increases Moderate as Inflation Cools in June

After reaching a 40-year high of 9.1% in the United States, inflation has now decreased by about two-thirds. However, further efforts are needed to bring down annual consumer price increases to the more typical 2% level targeted by federal policymakers.

In June, inflation continued to cool for the twelfth consecutive month, with stable grocery prices partially offsetting the rebound in gasoline costs and ongoing rent hikes. The core inflation rate, which is closely monitored by the Federal Reserve, declined more than expected.

According to the Labor Department’s consumer price index, consumer prices overall rose 3% compared to the previous year, down from May’s 4% increase. This marks the smallest yearly increase since March 2021. On a monthly basis, prices increased by 0.2% following a 0.1% rise in May.

Core prices, which exclude volatile food and energy items and provide a better reflection of longer-term trends, have proven more challenging to subdue. After a three-month period of slightly stronger gains, core prices rose by a smaller-than-expected 0.2%, resulting in an annual increase of 4.8%, down from 5.3% in the previous month. This is the lowest level since October 2021.

While pockets of core price pressures still exist, critical inflation categories are gradually cooling, as noted in a statement by Contingent Macro Research.

The inflation landscape presents a mixed picture. Prices for used cars and certain goods have been rising more slowly or even declining as supply chain disruptions caused by the pandemic have eased. However, the cost of services such as haircuts and auto repairs continues to rise briskly due to labor shortages and increased wages resulting from the impact of COVID-19.

Despite the significant easing of core inflation, most economists believe it may not be sufficient for the Federal Reserve, which closely monitors this key price measure. Consequently, forecasters anticipate that the Fed will resume raising interest rates this month after pausing in June to evaluate the economic effects of its aggressive tightening measures since early 2022. However, the slowdown in core price increases could influence the Fed to maintain steady rates for the remainder of the year.

Gas prices experienced a 0.8% increase in June but remain 26.8% lower than the previous year. Although gas prices have been volatile, they have remained relatively low due to concerns about global oil demand and prices amidst ongoing recession fears. The national average for regular unleaded gasoline was $3.54 per gallon on Tuesday, up from $3.59 a month earlier but down from the peak of $5 in June 2022.

On Wall Street, investors reacted positively to the continued easing of inflation, resulting in the S&P 500 reaching its highest level since April 2022. The index rose by 0.7% to 4,472.16, while the Dow Jones Industrial Average increased by 0.3% to 34,347.43, and the Nasdaq composite gained 1.2% to 13,918.96.

Housing costs, particularly rent, remain the primary driver of inflation, although the rate of increase has moderated somewhat. Rent experienced a solid 0.5% rise, following several similar increases, but at a slower pace. Annually, rent was up 8.3%, down from 8.7% in the previous month. Economists predict that rent increases will decrease significantly based on new leases, although the impact on existing leases has been slower to materialize.

Apparel prices rose by 0.3%, car repair costs increased by 1.3%, and auto insurance prices jumped by 1.7%. Conversely, used car prices resumed their downward trend with a 0.5% decline, resulting in a 5.2% annual decrease. Airline fares slid by 8.7%, primarily due to lower jet fuel prices, and hotel rates dipped by 2%. Appliance prices continued their decline with a further 1% drop.

The Federal Reserve is particularly focused on reducing price increases for services, excluding housing, which are driven by wage growth and have remained stubbornly high despite moderation in other categories. In June, this measure remained unchanged, with an annual rise of 4.1%, down from 4.6% in the previous month, according to an analysis of Labor Department data by High Frequency Economics.

Exploring Inflation: Answers to Your Questions

USA TODAY is here to address your everyday inquiries about inflation. From understanding the concept of inflation to the implications of a recession, we’ve got you covered. Take a look at our answers to some of the most common questions about the latest inflation report and other economic trends that impact your daily life.

What has been the monthly U.S. inflation rate? The inflation rate in the U.S. has decreased significantly, dropping by more than half from its peak of 9.1% in June of the previous year. Here is a monthly breakdown of the U.S. inflation rate since May 2022:

May 2022: 8.6% June 2022: 9.1% July 2022: 8.5% August 2022: 8.3% September 2022: 8.2% October 2022: 7.7% November 2022: 7.1% December 2022: 6.5% January 2023: 6.4% February 2023: 6.0% March 2023: 5.0% April 2023: 4.9% May 2023: 4.0% June 2023: 3.0%

How is inflation measured? Inflation is typically measured by comparing the current prices of goods and services with their recent history. Several government-released data reports are used to assess inflation.

The most prominent metric is the Consumer Price Index (CPI), published by the U.S. Bureau of Labor Statistics. It measures the prices of goods in urban markets, representing over 90% of the American population. The CPI analyzes a fixed basket of approximately 80,000 goods and services. The contents of this basket are determined by the Consumer Expenditures Survey, which collects information from Americans about their spending habits. The CPI has different versions, including the Chained Consumer Price Index for All Urban Consumers, which accounts for substitution of similar items, providing a more accurate reflection of consumer spending and inflation trends.

Another measure of inflation is the price index for Personal Consumption Expenditures (PCE), released by the Bureau of Economic Analysis. Unlike the CPI, the PCE takes a more holistic view by considering all expenses, including those covered by insurance. The Federal Reserve considers the PCE as the gold standard for evaluating inflation and aims for a 2% inflation target.

The concept of “core inflation” is also important, as it excludes the prices of food and energy, which are more volatile and can distort overall inflation trends.

How does raising interest rates combat inflation? To control inflation, the Federal Reserve primarily relies on adjusting the federal funds rate, which affects the interest rates banks charge each other for overnight loans. When the Fed raises the fed funds rate, other interest rates, including those for mortgages, credit cards, and loans, tend to follow suit. Higher interest rates reduce borrowing and help cool down an overheated economy, mitigating the risk of inflation spikes.

What distinguishes the CPI from the PPI? The CPI measures inflation from the perspective of consumers, reflecting their daily experiences. On the other hand, the Producer Price Index (PPI) measures the average change over time in the selling prices received by domestic producers for their output. The PPI, often referred to as wholesale price inflation, is assessed at an earlier stage of the production and marketing cycle and can influence the CPI.

According to the Richmond Federal Reserve, movements in the PPI are seen as indicators of pricing changes in the early stages of production, potentially signaling future movements in consumer prices.

Why is the CPI important? The CPI holds significance for multiple reasons. It is used to adjust social security payments and serves as a reference rate for certain financial contracts. While the Federal Reserve’s inflation target is focused on the PCE at around 2%, the CPI often garners more attention due to its broader impact on various aspects of the economy.

The Federal Reserve’s upcoming policy meeting, scheduled to conclude on July 26, will feature an interest rate decision. Most economists anticipate a quarter-point rate hike to bring the short-term benchmark fed funds rate within a range of 5.25% to 5.5%.

Does the Federal Reserve consider only the CPI for measuring inflation? No, the Federal Reserve’s preferred inflation gauge is the Personal Consumption Expenditures (PCE) price index, provided by the Bureau of Economic Analysis. PCE measures price changes for all direct and indirect consumer consumption, encompassing a wider range of goods and services and including a more diverse group of people surveyed.

Unlike the CPI, which focuses solely on out-of-pocket expenses for urban households, PCE accounts for all expenses, including those covered by employer-provided insurance, Medicare, and Medicaid. Furthermore, PCE considers substitutions in consumption patterns, adjusting the basket of goods to reflect changes in consumer behavior. As a result, PCE typically shows slightly lower inflation rates compared to the CPI.

What was the PCE in May? In May, PCE prices rose by 0.1% compared to April, a decline from the previous month’s 0.4% increase. Year-over-year, prices increased by 3.8% in May, down from April’s 4.3%. Although significantly lower than the peak of 7% reached in June of the previous year, the year-over-year figure remains above the Federal Reserve’s 2% target. Core PCE, which excludes food and energy prices, increased by 0.3% from April and remained unchanged at 4.6% compared to the previous year.

Federal Reserve’s Rate Hike: Balancing Inflation Concerns

Despite signs of easing inflation, the Federal Reserve continues to raise interest rates, indicating concerns that inflation may not be cooling at a sufficient pace. While the labor market is showing some weakening, it has not yet reached a level that would drive down the Consumer Price Index (CPI) services rate and meet the Fed’s 2% target.

In the previous month, the economy added 209,000 jobs, bringing the unemployment rate down to 3.6%. Average hourly earnings also saw a slight increase of 12 cents to $33.58, resulting in a yearly increase of 4.4% compared to the Fed’s desired 3.5% or lower. This elevated wage growth poses a challenge in achieving the Fed’s inflation target.

Lowering inflation is a priority for the Federal Reserve as it recognizes that higher prices for essential items like food, gasoline, and shelter place additional burdens on families, especially those facing job losses and reduced incomes. The Fed aims to strike a balance between maintaining a healthy labor market and keeping inflation in check to ensure the overall economic well-being of households.