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

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

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.