Key takeaways

  • The June 2024 Consumer Price Index (CPI) fell by 0.1% month-over-month (MoM) and rose by 3.0% year-over-year (YoY).
  • Inflation eased across the board; we finally saw a welcome move with lower shelter price pressures (inflation coming from the housing market). We also saw favorable declines in gasoline and airfares prices.
  • In our view, this is a welcome report for the Federal Reserve (Fed) that should further increase confidence that inflation is on its way back to the 2% target. June’s inflation report along with last week’s jobs report supports the view that we are getting closer to a rate cut, perhaps as soon as September.

Contributors

Cristina Dwyer

Analyst, J.P. Morgan Wealth Management

The June 2024 Consumer Price Index for All Urban Consumers (CPI-U) fell 0.1% month-over-month (MoM) (the first decline in MoM inflation since May 2020!), after remaining unchanged in May. This helped moderate the year-over-year (YoY) CPI to 3% from 3.3% in May,1 the slowest annualized pace since June 2023. The easing in headline and core CPI suggests that inflation is trending in the right direction.

The softer inflation data, coupled with June’s employment report, which underscores a balanced labor market with signs of easing, are welcomed developments for the Fed that should increase their confidence inflation is on its way back to the 2% target.

Report highlights

The slowing in consumer prices was driven by a sharp decline in gas prices and easing shelter price pressures (inflation coming from the housing market). Gasoline prices fell 3.8% MoM in June, following a 3.6% decline in May. This contributed to the 2% MoM decline in the energy index for the second consecutive month.2 We expect the drop in gasoline prices to offset some consumer worries over high inflation.

The food index rose by 0.2% MoM for the second consecutive month, as food away from home prices rose 0.4% MoM and food at home prices rose 0.1% MoM.3 The continued rise in food prices was offset by the declines in energy and transportation prices.

A continued moderation in inflation should provide some relief to consumers. As long as wages continue to rise at a faster pace than inflation, consumer spending will likely still provide a positive contribution to economic growth in the second quarter.

This bar graph shows the contributions of various subcomponents of the CPI index to the overall CPI index from February 2020 to June 2024.

Core CPI findings

Core CPI (excluding food and energy) increased by a softer than expected 0.1% MoM, the slowest pace since August 2021, and by 3.3% YoY. June’s rise in core CPI continued to be driven by the shelter component despite notable signs of easing. Shelter prices increased by a softer 0.2% MoM rise in June than the 0.4% rise in May. Owners’ equivalent rent (OER) and the rent index both rose by only 0.3% MoM,4 their smallest gains since August 2021.

This marks significant progress for inflation, as shelter prices have been sticky and have accounted for about a third of the total inflation basket. But shelter inflation has to fall further for rates to decline to the Fed’s 2% target.

There were also price increases in motor vehicle insurance, medical care and household furnishings and operations. Meanwhile, prices fell among airfares, used cars and trucks and communication in June.

Airfares have markedly declined despite recent resilient travel demand. We expect this trend could reverse in the next two months given the recent rise in jet fuel prices which are often followed by rises in the airfares index.5

Going forward, we expect core inflation to further moderate this year as the economy and labor market soften amid high interest rates.

Possible implications for the Fed

The broad-based cooldown in CPI combined with the restoration of balance between supply and demand in the labor market supports the view that we are getting closer to a rate cut, perhaps as soon as September.

The bottom line

June’s inflation data gives the Fed further confidence that the direction of inflation, and more broadly the more balanced labor market, are heading in the right direction.

We still expect the Fed to begin cutting interest rates at some point later in the year, as Powell expressed at the Federal Market Committee (FOMC) meeting in June. For more information on how this economic data may impact your investment strategy, consult a financial advisor.

References

1.

U.S. Bureau of Labor Statistics (BLS), “Consumer Price Index Summary.” (July 11, 2024)

2.

Ibid.

3.

Ibid.

4.

Ibid.

5.

Ibid.

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