For the first time in more than four years, inflation actually dipped monthly, sliding 0.1% from May to June, according to the U.S. Bureau of Labor Statistics’ latest Consumer Price Index (CPI) report.
The decrease put the annual inflation figure at 3%, down from 3.3% in May and near its lowest level in over three years, matching a recent low set in June last year. The decline was fueled by a 3.8% fall in the price of gasoline, counterbalancing 0.2% gains in food and shelter prices. And considering how stubbornly sticky inflation in shelter costs has been, the slowing of shelter price growth from 0.4% in May to 0.2% in June still rates as a very positive development.
The core CPI, which doesn’t include price shifts in the volatile food and energy sectors, was up just 0.1% month over month and 3.3% year over year, its lowest annual gain since April 2021.
The notoriously laggy shelter segment showing some encouraging activity is good news for both total and core CPI, given shelter’s outsized weighting in inflation calculations.
“The index for shelter increased 5.1% year over year, a clear improvement over the 5.4% year-over-year growth in May, but still elevated,” said Mark Fleming, chief economist at First American Financial Corp. “Shelter inflation is slow to respond to the current market changes in rent or owner’s equivalent rent, lagging current conditions by 12-to-18 months, but the most recent trend in market rents as a leading indicator of overall shelter inflation, is indicating further slowing in shelter CPI should be expected.”
The unexpected drop in the total CPI (a Reuters poll of economists projected an increase of 0.1%) might headline the rosiest CPI report the Federal Reserve has seen since it first started raising its anchor interest rate in 2022.
“The June CPI data is music to the Fed’s ears,” Fleming said. “Not just a slowing pace of inflation, but an actual month-over-month decline (aka deflation), at least in the overall CPI. That hasn’t happened since May 2020 in the early days of the pandemic.
More to the point for a mortgage industry desperate for a rate cut to spur homebuying activity, June’s CPI report may likely help bring the Fed closer to the elusive confidence it’s seeking to begin a lowering cycle.
“Knowing shelter inflation will continue to decline combined with the broader good inflation news has increased the likelihood of a September rate cut by the Fed and maybe another rate cut by the end of the year,” Fleming said. “Good news for homebuyers as that expectation alone is lowering mortgage rates now.”
