In June 2023, the United States experienced a notable slowdown in annual inflation, with the Consumer Price Index (CPI) reporting a rate of 3% YoY (v +3.1% expected by the Bloomberg consensus), aligning with our main external contributor expectations. This marks a significant decline from the previous year’s spike of 9.1%, which was the highest annual rate since November 1981. The Bureau of Labor Statistics released these figures, revealing the 12th consecutive month of dsinflation as measured by the CPI YoY.
US CPI June 2023: Slower Inflation Than Expected and Contributing Factors
On a monthly basis, prices increased by a modest 0.2% in June (vs +0.3% expected by the Bloomberg consensus), following a 0.1% increase in May. Notably, shelter costs, primarily represented by rental leases and the implicit rental value of owner-occupied properties, accounted for 70% of the overall increase in June, according to the Bureau of Labor Statistics. Yet, several proxies already suggest that this contribution is likely to weaken in the coming months.
In the meantime, core goods prices dropped 0.1%, reversing a three-month trend of increase. It was partly explained by a drop of used-car prices (-0.5% v +4.4% prior). The decline could be larger in the coming months as suggested by several proxies including Manheim index.
Federal Reserve’s Measures and Impact on Inflation
Since March 2022, the Federal Reserve has implemented ten consecutive interest rate hikes aimed at curbing inflationary pressures. This tightening cycle helped bring annual inflation down to 3% in June 2023 YoY. In response to the progress made, the Federal Reserve decided to pause its rate hikes last month. However, market analysts widely anticipate another quarter-point rate increase when the Federal Reserve convenes later this month.
Core Inflation and Price Moderation
The core CPI index, which excludes the volatile categories of food and energy, recorded a 4.8% increase for the 12 months ending in June 2023. This represents a decline from the 5.3% rate observed in May and the 5% predicted by economists. On a monthly basis, the core CPI increased by 0.2% in June, compared to the 0.4% rise seen in May. It’s interesting to note that, in June, core inflation ran below 2% target on a MoM Annualized basis. Furthermore, supercore inflation also showed clear signs of weakening over the past three months.
Implications for the Federal Reserve and Monetary Policy
Although inflationary pressures have shown signs of abating, the current rate of 3% remains above the Federal Reserve’s target of 2%. With the labor market still tight and unemployment at historically low levels, the Federal Reserve faces the challenge of maintaining a delicate balance between controlling inflation and sustaining economic growth. While recent employment data indicated slower job growth, wage kept rising by 4.4% YoY in June. In addition, a rebound of house prices and another improvement of financial conditions are likely to lead to another hike this month.
Outlook and Market Response
The latest CPI data and the prospect of continued inflation management by the Federal Reserve have had notable effects on financial markets. Yields on two-year Treasury bonds, which are closely tied to interest rate expectations, fell to their lowest level in two weeks. In the futures market, traders have scaled back their expectations for higher interest rates in the second half of the year, although an increase from the Federal Reserve is still anticipated in July. US stock market futures reacted positively to the CPI report, with the S&P 500 expected to open about 0.7-0.9% higher.
