Life in America is getting steadily more affordable. On Wednesday, the Department of Labor reported that the Consumer Price Index, its broadest measure of inflation, came in at 3 percent in June — lower than much of Wall Street had expected and far below its 9.1 percent peak a year ago. It’s now the 12th month in a row that the inflation rate has fallen, with prices for gas, groceries, rent, and just about everything else coming down after spiking in the wake of the pandemic. Not only is the end of high inflation in sight but so may be the campaign to end it. The Fed’s often painful interest-rate-hiking regime has caused collateral damage to the housing markets, a handful of large banks, and Americans’ credit-card bills. The timing of a possible Fed pullback is key to the question of whether the U.S. will fall into the recession that has been widely, and so far wrongly, predicted for over a year or continue to escape it.
The Consumer Price Index is a kind of measuring stick to gauge how corrosive the rate of price increases is on the typical consumer. The results from June are hard to argue with. Groceries were flat. Gas rose slightly but is 26.5 percent cheaper than it was a year ago. A whole bunch of prices around travel were lower in June than in May: Airfare was down 8.1 percent, hotels cost 2.3 percent less, and car and truck rentals were 1.4 percent lower. The biggest increase in the annual inflation rate came from shelter costs, in particular a 0.4 percent increase in rent. But as I’ve written, the Labor Department measures rent costs on a lag, and the actual cost has been falling for some time now, at least as measured by companies like Redfin. The overall increase from May to June was 0.2 percent, a modest number that’s in line with what was considered normal for most of the 21st century thus far. The last time the annual rate was this low, it was March 2021 — just before things went off the rails.
There is a risk buried in all this good news, though. The Fed is unlikely to back off from raising interest rates further. Rich Barkin, president of the Richmond Fed, said that “inflation is still too high” and that the central bank probably won’t end its campaign now. This echoes what his Minneapolis counterpart, Neel Kashkari, told me in May — essentially that the economy can handle more rate increases, and the danger is in stopping before the job is done. It’s likely that any further increases will be modest, far smaller than the jumbo rate hikes of 2022. Hiking at all going forward would be a message to Wall Street not to get complacent or greedy and start raising prices again. But it would also be a sign that central bankers believe the economy is still too loose — and they’re not alone in thinking that.
Still, Fed governors have to like what they’re seeing. The “core” inflation rate, which takes out volatile gas and food prices, fell to 4.8 percent — the lowest in two years and well below what economists had expected. An even more restrictive measure of the cost of services, which is watched closely by Fed chair Jerome Powell, was practically unmoved for the month. The upshot is that the economy is cooling faster than expected and could be doing so in a way that’s unlikely to reverse itself.
Look at it one way and the war on inflation has been won. Wages are rising and outpacing the cost of living — finally. (More people, especially Black Americans, are losing their jobs, though the unemployment rate fell to 3.6 percent last month.) But the fact that there’s even a question about how the Fed should proceed shows how little economists understand about the causes behind last year’s oppressive price spikes. Consider this economic riddle: If inflation rises to generational highs when people’s actual wages are falling, as it did last summer, but then collapses when workers can actually afford to live, which is what’s happening now, do the two things have anything to do with each other? This is a critical question. While Powell has downplayed the impact wages have had on inflation thus far, it’s unclear if this will hold steady if real wages continue to rise.
Wall Street now thinks there will be one more rate hike for the year, but traders have largely failed to understand the Fed’s thinking in the past year or so. We won’t really know what the Fed will do until Powell just does it. Fed officials have been diligent about projecting seriousness as a way to assure the markets that they aren’t going to reverse course, cut rates, and send prices upward again. It’s unlikely they would do the same ahead of a period of loosening since the fear of reawakening inflationary forces has driven their policy through the post-pandemic period. After meeting this July, the Fed takes August off before considering how much it should tighten rates in late September. It’s possible the Fed could send prices shooting higher or plunge the economy into recession after all. But with unemployment at historic lows and sticker shock subsiding, the road ahead looks less rocky than it has in a while.
