Understanding the Implications of the Most Recent Inflation Data for You

The recent Consumer Price Index (CPI) report released on Wednesday offers some encouraging news for households in the US. It indicates that while inflation remains above optimal levels, it is decelerating, implying that price hikes are subsiding in certain sectors (CPI Report, 2023).

The report, which evaluates the cost of goods for urban consumers, such as food and housing, over time, reveals that the overall CPI increased by 0.2 percent in June compared to May, and 3 percent compared to June 2022. This is the lowest annual inflation rate in recent months, marking a significant drop from last June's annual rate of 9.1 percent (CPI Report, 2023).

However, core inflation, which considers the same goods as CPI but excludes food and energy prices due to their volatility, remains slightly higher at 4.8 percent year over year. Despite this, it's the lowest core inflation has been since October 2021 (CPI Report, 2023).

Mark Zandi, Moody's chief economist, stated, "Inflation is throttling back, particularly for staples such as gas [and] food, and this should continue in coming months" (Zandi, 2023). He further added that the inflationary impact from the pandemic and the Russian war continues to fade as these supply shocks are increasingly in the rearview mirror.

Economists do not anticipate the CPI report to immediately halt the Fed's interest rate increases. Officials are expected to implement another rate hike later this summer as they aim to reduce inflation to 2 percent. However, the CPI report is among recent developments that suggest the US may avoid a recession and potentially more aggressive rate hikes in the future (Federal Reserve, 2023).

While experts note that the economy hasn't quite achieved a "soft landing" — a state of low inflation that also avoids a recession — the latest data suggests that the Fed's actions are having an impact (Federal Reserve, 2023).

The report indicates that prices in certain areas, such as energy and used cars, are decreasing on an annual basis, while prices in other areas, like housing, continue to persist at higher levels. Economists have noted that rent prices reflected in the CPI tend to lag behind price decreases observed in the market (CPI Report, 2023).

Gas prices have seen a significant year-over-year decline, although they increased slightly compared to the previous month. Grocery prices have seen a year-over-year increase, but some items, like eggs and dairy, have declined compared to previous months. These decreases primarily drove the lower CPI number, providing consumers with some relief on these particular costs (CPI Report, 2023).

However, housing costs, including rent, have increased both annually and monthly, contributing a significant share to inflation. Economists expect rent increases to ease substantially based on new leases, but this shift has been slow to filter through to existing leases (USA Today, 2023).

Josh Bivens from the Economic Policy Institute noted, "Energy prices have definitely come down a lot in absolute terms over the past year. Grocery prices have fallen in absolute terms — i.e., not just slower inflation, actual price declines — since March" (Bivens, 2023). However, Bivens cautioned that it's not certain that these prices will continue to drop.