Inflation data good; FED Speak still hawkish and rate hikes still coming.

In June, further strides were made in the ongoing battle against inflation. However, these developments do not necessarily alter the likelihood of a Federal Reserve rate hike later this month. Consumer prices recorded a 0.2% increase in June, falling below the expected consensus of 0.3% and bringing the twelve-month change down to 3.0%. While this might suggest a recent rapid moderation in inflation, a closer analysis reveals that this is primarily attributed to the outsized price jumps witnessed last year.

Notably, the inflation rates of 0.9% in May 2022 and 1.2% in June 2022, which are now rolling off the year-on-year comparisons. As history has shown, a surge in inflation is often followed by a period of minimal movement, as observed in July and August 2022. Consequently, it is likely that the twelve-month inflation readings will re-accelerate towards the end of the summer.

When combined with the resilience of the US labor market, these factors provide a compelling rationale for Powell and the Federal Reserve to maintain a tight monetary policy in the months ahead. A closer examination of the latest report reveals that energy and food prices both rose in June. After excluding these components, “core” prices mirrored the 0.2% overall increase, while the twelve-month comparison declined to 4.8%. Once again, housing rents emerged as the primary driver within the core categories, rising by 0.5% in June. Although rental inflation has moderated since the rapid pace observed in the second half of 2022, both actual tenant rents and the imputed rental value of owner-occupied homes continue to grow at or above a 6% annualized rate across three-, six-, and twelve-month timeframes. These figures are noteworthy, as they contribute to one-third of the overall index weighting and have been significant contributors to the persistently high inflation experienced over the past two years. Going forward, we anticipate rents continuing to generate inflation as they catch up with the soaring home prices witnessed in 2020-21.

Several categories experienced declines in June, exerting downward pressure on core inflation. Airfare (-8.1%), hotels & motels (-2.3%), and used vehicles (-0.5%) were among the contributing factors. Meanwhile, a subset category closely monitored by the Federal Reserve, known as the “Super Core,” which excludes food, energy, other goods, and housing rents, remained unchanged in June, marking its lowest monthly reading in nearly two years. Over the past twelve months, prices within the Super Core category have increased by 3.9%. The moderation in inflation this year can be attributed to the deceleration of money supply growth, which had surged in 2020-21. The M2 measure of money is currently down 4.0% compared to a year ago. Although it remains to be seen whether this trend will persist, if it does, it could eventually bring inflation back in line with the Federal Reserve’s target of 2.0%. At present, the Federal Reserve has made some headway in its fight against inflation, but it is essential to acknowledge that the battle is far from over.