June CPI report: Inflation shows strong improvement, setting the stage for one last rate hike

Market response

July 13, 2023 | 2 min read

The Consumer Price Index (CPI) report for June showed inflation improving faster than expected. While headline inflation accelerated slightly to 0.2% month-over-month, the year- over-year rate declined markedly to 3.0%, down from 4.0% in May. Core inflation, which has been proving sticky in recent months, increased only 0.2% month-over-month, marking its slowest monthly rate since August 2021. On a year-over-year basis, core inflation declined to 4.8% from 5.3% in May.

Despite a significant move in the right direction, inflation remains well above the Federal Reserve’s (Fed’s) target level, and today’s print is unlikely to convince the Fed that their tightening cycle is complete. Our long-held forecast is for only one additional 25 basis point rate hike this year, taking the peak policy rate to 5.25%-5.50% by year end.

Consumer Price Index
Year-over-year % change, 2010–present

Line graph showing the consumer price index year-over-year % change from 2010-2023.

Source: Bureau of Labor Statistics, Principal Asset Management. Data as of July 12, 2023.

Report details:

  • It’s important to note that this month’s inflation print experienced a favorable year- over-year comparison, since June 2022's headline CPI was a scorching 9.1%. Going forward, these comparisons may become more challenging as prior-year inflation readings experience reduced base effects. Specifically, July 2022 experienced no month-over-month change in CPI. This means that next month’s inflation reading will most likely show an acceleration in year-over-year inflation.
  • Still, the June inflation figures are better than even comparisons against prior periods might suggest. On an annualized basis, the headline and core month-over-month figures were 2.2% and 1.9%, respectively. These data are in line with historical inflation trends and the Fed’s target.
  • Breaking down core inflation shows that year-over-year core goods inflation is only 1.3% compared to 5.7% for services. Services inflation is expected to continue to decline as shelter prices stabilize. Year-over-year core goods inflation has hovered around the Fed’s target since the start of the year.
  • Shelter inflation, which consists mostly of rents and owners’ equivalent rents, decelerated to 7.8% year-over-year, down from its peak of 8.2% in March. On an annualized month-over-month basis, June’s shelter inflation represents an increase of 4.5%, its slowest rate since January 2022. Housing prices are expected to continue their decline as new lower rent leases replace old higher leases.

These numbers suggest that inflation is easing across many categories. However, they may also be the result of rapid Fed rate hikes of the past year impacting growth. Given the strength of the labor market and the fact that core inflation remains elevated and sticky, an additional interest rate hike at the Fed’s meeting later this month remains highly likely.

Macro views
Disclosure

Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results.

Views and opinions expressed are accurate as of the date of this communication and are subject to change without notice. This material may contain ‘forward-looking’ information that is not purely historical in nature and may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information in the article should not be construed as investment advice or a recommendation for the purchase or sale of any security. The general information it contains does not take account of any investor’s investment objectives, particular needs, or financial situation.

2999353