As per CPI Report Live Updates Inflation in the United States is finally starting to ease after reaching a 40-year high of 9.1% last year. However, bringing down annual consumer price increases to a more normal level of around 2% is proving to be a challenge for policymakers.
In June, inflation continued to cool for the 12th consecutive month, with grocery prices staying flat and offsetting a rebound in gasoline costs and rent hikes. Core inflation, which is closely monitored by the Federal Reserve, eased more than expected.
According to the Labor Department’s consumer price index, consumer prices overall increased by 3% compared to the previous year, down from 4% in May. This marks the smallest yearly increase since March 2021. On a monthly basis, prices rose by 0.2% following a 0.1% increase in May.
Understanding CPI and Core CPI
The consumer price index (CPI) measures changes in the prices of goods and services. Core CPI, on the other hand, excludes volatile food and energy prices to provide a clearer view of longer-term trends. Core prices rose by a smaller-than-expected 0.2% in June, reducing the annual increase from 5.3% to 4.8%, the lowest since October 2021.
According to Contingent Macro Research, while there are still some areas experiencing core price pressures, key inflation categories are gradually cooling down.
The inflation picture has been mixed overall. Prices for used cars and other goods have been rising more slowly or even falling as supply chain issues caused by the pandemic have improved. However, the cost of services such as haircuts and auto repairs continues to rise due to labor shortages and increasing wages.
The Federal Reserve’s Plan
Despite the easing of core inflation, economists believe it may not be enough for the Federal Reserve, which closely monitors this key measure of prices. As a result, it is expected that the Fed will raise interest rates again this month after pausing in June to assess the economic impact of previous rate hikes. However, the slowdown in core price increases could lead the Fed to keep rates steady for the remainder of the year.
Gasoline Prices Outlook
Gas prices increased by 0.8% in June but are down 26.8% compared to the previous year. Pump prices have remained relatively low due to concerns about a global oil demand slowdown caused by the ongoing recession. The national average for regular unleaded gasoline was $3.54 per gallon, up from $3.59 a month ago but down from a peak of $5 in June 2022.
Stock Market Reaction
Following the release of the inflation report, the broad S&P 500 index rose by 1%, the Dow increased by 0.86%, and the tech-heavy Nasdaq-100 climbed by 1.23%.
Food Prices Forecast
Grocery prices remained unchanged in June after either falling or rising modestly in the previous three months. This resulted in a decrease in the yearly increase from 5.8% to 4.7%. The cost of commodities like wheat and corn has declined due to easing global demand.
In June, the price of eggs dropped by 7.3% following a 13.8% decrease in May. This marks the fourth consecutive monthly decline after a series of sharp increases due to bird flu concerns, bringing the costs down by 7.9% over the past year. Bacon prices fell by 1.7%, cookies dipped by 0.7%, and fresh biscuits, rolls, and muffins slipped by 0.1%.
However, some costs saw slight increases. Breakfast cereal rose by 1.1%, bread prices ticked up by 0.7%, uncooked ground beef jumped by 1.6%, while chicken prices increased by 0.6%.
Restaurant prices have not decreased as much, mainly due to rising wages resulting from labor shortages caused by the pandemic. The cost of dining out increased by 0.4% and has risen by 7.7% over the past year.
Housing costs continue to be the largest driver of inflation, although the rate of increase has slowed down somewhat. Rent increased by 0.5% in June, following several similar gains but at a slower pace.
Annually, rent was up by 8.3%, down from 8.7% the previous month. Economists expect rent increases to decrease substantially based on new leases, but this shift has been slow to impact existing leases.
Other notable changes in prices include a 0.3% increase in apparel prices, a 1.3% increase in car repair costs, and a 1.7% increase in auto insurance prices.
Used car prices fell by 0.5%, resuming a downward trend after a period of increases. Prices have decreased by 5.2% compared to the previous year. New car prices remained unchanged after a slight dip in the previous two months.
Airline fares decreased by 8.7% due to lower jet fuel prices and are down 18.9% annually. Hotel rates dipped by 2%, reversing the increase observed in May. Appliance prices, which have been falling in recent months, declined by another 1%.
The Fed is particularly focused on reducing price increases for services, excluding housing, which are driven by wage gains and have remained persistently high despite moderation in other categories.
According to an analysis by High-Frequency Economics, this measure remained unchanged in June and increased by 4.1% annually, down from 4.6% the previous month, based on Labor Department data.
How Is Inflation Measured?
Inflation is measured by comparing the current prices of goods and services to their recent history. The Consumer Price Index (CPI), released by the US Bureau of Labor Statistics, is the most prominent metric used for this purpose.
The CPI examines the prices of goods in urban markets, representing over 90% of the American population. It looks at a “fixed basket” of around 80,000 goods and services to determine these numbers.
The contents of the basket are determined through the Consumer Expenditures Survey, which polls Americans to identify important goods. The importance of these goods determines their weight in the CPI. For example, the price of gasoline, a significant component of living expenses for many people, carries more weight than other items.
There are different versions of the CPI, including the Chained Consumer Price Index for All Urban Consumers, which is used to adjust tax brackets. The Chained CPI takes into account the substitution of similar items that often occurs when prices increase due to inflation. This provides a more accurate view of consumer spending and avoids overstating inflation.
Another measure of inflation is the price index for Personal Consumption Expenditures (PCE), released by the Bureau of Economic Analysis. The PCE takes a more comprehensive approach by considering all expenses, including healthcare coverage compensated by insurance.
The Federal Reserve regards the PCE as the gold standard for evaluating inflation, with a target of 2% inflation.
Core inflation is another important aspect. It measures inflation but excludes food and energy prices, which are more volatile.
How Do Higher Interest Rates Control Inflation?
One of the main tools the Federal Reserve uses to control inflation is the federal funds rate. This rate represents the interest rate at which banks lend to each other overnight.
When the Fed raises the Fed funds rate, it indirectly affects other interest rates throughout the country. This includes rates for adjustable-rate mortgages, credit cards, home equity lines of credit, and other loans.
By increasing interest rates, borrowing becomes more expensive, which helps to cool down an overheated economy. Higher rates discourage excessive borrowing and spending, which can contribute to inflationary pressures. This is why raising interest rates is a tool used by the Federal Reserve to combat inflation spikes.
Difference Between CPI and PPI
The Consumer Price Index (CPI) measures inflation from the perspective of consumers. It looks at the prices of goods and services that people encounter in their daily lives. 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.
PPI is often referred to as wholesale price inflation and is measured at an earlier stage of the production and marketing cycle. It has an influence on CPI, as changes in wholesale prices can be an early signal of future movements in consumer prices.
The PPI reflects pricing changes early in the pipeline and is considered by some analysts as an indicator of future consumer price movements.
Conclusion of CPI Report Live Updates:
Inflation in the United States has been gradually cooling, with consumer price increases easing in June. Although core inflation remains a concern, there are signs of improvement in critical categories of inflation.
The Federal Reserve is expected to raise interest rates again to further address inflationary pressures, but the slowdown in core price increases may influence their decision.
Gasoline prices have remained relatively low, and food prices have shown mixed trends, with some items experiencing decreases while others see slight increases. Housing costs continue to be a significant driver of inflation, but the rate of increase has slowed down.
The stock market reacted positively to the inflation report, and bond prices rose while the 10-year Treasury yield fell.
Inflation is measured using metrics such as the Consumer Price Index (CPI) and the Producer Price Index (PPI), which provide insights into changes in prices of goods and services from both consumer and producer perspectives.
The Federal Reserve focuses on controlling inflation through tools like the federal funds rate, which influences other interest rates in the economy.
Overall, the recent CPI report indicates some progress in cooling inflationary pressures, but further actions may be necessary to achieve the Federal Reserve’s target of stable and sustainable price increases.