Inflation Cools in June Amid Slowdown in Consumer Demand

Key Takeaways:

• The Consumer Price Index (CPI) rose 0.2 percent in June and slowed to an annual rate of 3.0 percent, the lowest since March 2021, according to the Bureau of Labor Statistics (BLS). Food prices rose 0.1 percent and energy prices were up 0.6 percent. Core CPI, which removes food and energy, increased 0.2 percent over the month and slowed to an annual rate of 4.8 percent, a deceleration of five-tenths from May. After rising strongly in April and May, used car and truck prices declined 0.5 percent. Shelter prices showed further signs of deceleration, rising 0.4 percent over the month but slowing to a 7.8 percent year-over-year gain, a deceleration of two-tenths compared to May.
• The Producer Price Index (PPI) increased 0.1 percent in June following a sharp downward revision of five-tenths to May, according to the BLS. On a year-over-year basis, producer prices rose just 0.1 percent. Core PPI rose 0.1 percent in June. Compared to a year ago, the core PPI rose 2.6 percent, a deceleration of two-tenths.
• Consumer (non-mortgage) credit outstanding increased by $7.2 billion in May, the smallest monthly gain since November 2020, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $8.5 billion, while nonrevolving credit (largely student and auto loans) declined by $1.3 billion.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index increased 1.6 points to 91.0, its highest level since November 2022. On net, 40 percent of firms expect the economy will not improve, an improvement of 10 percentage points, while 14 percent of firms expect real sales to be lower, an improvement of 7 percentage points. Inflationary pressures eased, with a net 29 percent of firms raising average selling prices, a decline of 3 percentage points, and 36 percent of firms raising worker compensation, a decline of 5 percentage points. At 24 percent each, inflation and quality of labor were cited most frequently as the single most important problem facing firms.

Forecast Impact:

Inflation measures cooled considerably in June, largely in line with our expectations. While the deceleration in the year-over-year CPI figure, from 4.0 percent in May to 3.0 percent in June, was due primarily to base effects, including last summer’s large energy spike rolling off the data, the month-over-month gains for both headline and core CPI pointed to a broad slowing in price increases that would be generally consistent with a 2-percent inflation target if sustained over time. We expect some continued easing of inflationary pressures stemming from an ongoing deceleration in shelter prices, which will converge with more timely measures of slowing home and rental price growth. Still, this is only one month of data, and signals from the labor market continue to suggest that wage growth likely remains too high to be consistent with the Fed’s inflation target, given the current rate of productivity growth. Therefore, we continue to expect an additional rate hike this month and a restrictive policy stance through the end of the year.

Producer prices were also cool in June, as they have been for most of the year. This suggests that ongoing slowing in consumer price increases could result from a pass-through of producer prices. The modest increase in consumer credit outstanding suggests that demand may be cooling, especially in the typically rate-sensitive auto industry. If sustained, this would be consistent with our forecast that consumer spending will be sluggish in coming quarters.

Nathaniel Drake
Economic and Strategic Research Group
July 14, 2023

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