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Inflation eased yet again in June, to 3.0%. Energy prices dropped for the second straight month. Prices excluding food and energy rose a modest 0.1%. New and used vehicle prices declined, with used prices down 10% over the past year. Medical services costs have risen by a smaller amount for three months in a row now. Airfares dropped for the fourth month in a row, on the heels of lower fuel costs.
The big news is that shelter costs rose by a modest 0.2%, their lowest monthly increase in nearly three years. Economists had long expected this, because market data on rents had been easing for a while. Housing is the largest single component of the price index, accounting for over a third of it. Inflation in services excluding shelter has been another Federal Reserve focus. This reading slowed to a 0.1% rise in June.
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Further progress on inflation in June raises the chances of a Federal Reserve interest rate cut, either in September or November. The Fed has been hesitant to make a move towards cutting rates until price increases in shelter and other services with a history of stubborn momentum started slowing down. Now, it appears that this is happening. Which month sees the first rate cut will likely depend on what the July and August inflation reports show.
Inflation reports in the next several months will likely not look as good as June’s. Energy prices have hit a floor, and the hot summer could send utility costs up. Other categories that can also have volatile price movements saw all the balls bounce in the same direction in June, allowing for the sizable dip in overall inflation. That may not be the case later in the year. Also, there are certain technical and seasonal adjustment factors that likely overstated the inflation slowdown in June. Nevertheless, even if shelter costs rise by 0.3% instead of 0.2% next month, and prices excluding food and energy rise by 0.2% instead of 0.1%, the Federal Reserve is likely to continue to see this as part of an overall downward inflation trend, keeping an interest rate cut on the table.
Annual inflation numbers for the rest of this year are not likely to dip below the current rate of 3.0%. That is the result of the relatively soft inflation that took place in the second half of 2023, which will make year-over-year comparisons in the upcoming CPI reports seem like little progress is being made. But analysts will be focused on the monthly changes since these will point to whether inflation is slowing now. If those monthly improvements materialize this summer, then expect the annual inflation rate to show a significant move towards the Fed’s target of 2% to 2.5% in the early spring of 2025.
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