Inflation Falls to 3% in June
- Erik James Roberts, Founder & Chief Investment Officer | Infinitus Wealth Management
- Jul 12, 2023
- 4 min read
Inflation eased in the previous month, reaching its slowest rate in over two years, as underlying price pressures cooled more than anticipated.
According to the Labor Department, the consumer price index rose by 3% in June compared to the same period last year. This figure is significantly lower than the peak of 9.1% in June 2022 and decreased from the 4% recorded in May. The last time inflation was near 3% was in March 2021.
Despite the decline, inflation remains above the Federal Reserve's target of 2%. Federal Reserve officials have indicated their intention to raise interest rates to the highest level in 22 years during their July 25-26 meeting, following recent indications of stronger-than-expected economic activity. The inflation report released on Wednesday is not expected to alter this outcome.
In their most recent meeting, officials maintained the benchmark federal funds rate within a range of 5% to 5.25%. This marked the first pause after ten consecutive rate increases since March 2022, when it was raised from near zero. During the June meeting, the majority of officials projected two additional rate hikes for this year.
Core consumer prices, which exclude the volatile food and energy categories, rose by 4.8% in June compared to the same period last year. This is the slowest rate since October 2021 and a decline from the 5.3% recorded in May. Economists had predicted a 5% increase in core prices.
In June, overall consumer prices increased by a seasonally adjusted 0.2% from the previous month, compared to a 0.1% gain in May. Core consumer prices also climbed 0.2%, the smallest monthly increase since August 2021, suggesting a gradual easing of underlying price pressures. Prices for used cars and airline fares experienced significant declines while car insurance rose. Rent increased in June but at the slowest monthly pace since early 2022.
Federal Reserve officials are primarily focused on reducing persistently high core inflation, considering it a better indicator of future inflation than the overall rate. Rising car prices, strong demand for labor-intensive services, and a previous surge in housing rental prices have driven core inflation.
Despite a 0.6% increase in energy prices during the month, the overall consumer price index (CPI) experienced a muted rise. However, compared to a year ago, when gasoline prices were around $5 per gallon, the energy index actually decreased by 16.7%.
Food prices only saw a slight increase of 0.1% in June, while used vehicle prices, which were a significant driver of inflation in early 2022, declined by 0.5%.
Airline fares witnessed a 3% decline during the month and are now 8.1% lower on an annual basis.
The moderation in the CPI had a positive impact on workers' wages. After adjusting for inflation, real average hourly earnings rose by 0.2% from May to June and increased by 1.2% year-over-year. This is in contrast to the period of high inflation last June when worker wages consistently lagged behind the rising cost of living.
Despite initial predictions of an economic downturn, the U.S. economy has remained resilient this year. Hiring slowed in June but remained strong, and consumer spending cooled in May compared to the previous month.
The Atlanta Fed's most recent estimate indicates that U.S. economic output grew at a 2.3% annual rate during the second quarter. While inflation has decreased compared to the previous year, it continues to negatively impact many consumers. Rising prices for rent and gasoline have put pressure on budgets, leading to adjustments in spending and saving habits for individuals.
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