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Monthly Economic Insights

Another positive CPI report for June: Inflation comes in at just 3%

Finally, the Fed may have inflation reliably heading in the right direction. Inflation anxiety continued to fade with the Bureau of Labor Statistics’ June 2023 CPI report showing a full 1-point drop to 3% year-over-year, marking the 12th straight month of decline and the lowest rate since March 2021.

Giving further hope to markets and recession watchdogs is the significant positive movement in the core measure (which excludes food and energy), which fell to 4.8%, unseen since October 2021.

Housing (one of the biggest drivers of the core measure) continues to drive the broader numbers lower as pricing pressures recede. Shelter costs increased by only 0.4% in June (4.8% annualized) – a welcome slowdown – compared to the preceding 12 months, being up 7.8%. A likely contributor to this slowdown is additional supply in the multi-family market. CBRE (the world’s largest commercial real estate services and investment firm) expects over 700,000 multi-family unit deliveries in 2023 and 2024 combined, or the largest such supply increase since the 1980s. Many of these projects were started prior to interest rates increasing, so one would expect a dramatic fall off in supply growth starting in 2025.

In more good news for individual consumers and families, the cost of food was up a modest 0.1% in June (1.2% annualized), led by the cost of food away from home, which went up 0.4% (4.8% annualized and driven by the need to help offset wage inflation). The price of food at home was flat for the month and only a third of the major food groups saw increases. While all of this is positive news, we do need to keep an eye on the recent grain developments in Ukraine (a top 7 producer and $5B+ exporter of: sunflower oil, corn, and wheat.)

Bottom Line: While this month’s report shows inflation moving closer to the Fed’s desired 2% target inflation rate, the Fed resumed lifting interest rates this month with a quarter-percentage-point increase. The decision to raise the benchmark federal-funds rate to a range between 5.25% and 5.5% follows a brief pause in increases last month. It is the 11th rate rise since March 2022.

Inflation has come a long way from the 9.1% peak in June 2022, but the Fed has been clear that rate hikes will still be considered until the CPI moderates more predictably.

The labor market has been an aggravating factor in the Fed’s efforts to curb inflation and it appears that will continue as well given the age 65+ cohort continues to grow faster than the workforce. We are also starting to see unions flex their muscle with the joint strike of writers and actors in Hollywood, and the Teamsters recently reaching an agreement with UPS highlighted by guaranteeing no less than $21 per hour for part-timers and pilot unions signing large increases (United as an example with an up to 40% increase over the next 4 years). However, the past year has seen a slowing rate of jobs growth amid a cooling demand for workers and a wave of layoffs in the tech sector.

Even with the positive CPI report, at least one more rate increase this year is not out of the question. Yes, the possibility of a recession still looms, but a more dovish tone on policy decisions may be on the horizon.

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— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company

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