The headline consumer price index (CPI) rose a modest 0.1% (month-on-month) in June, slightly below market expectations. That still took the year-on-year pace of inflation to 2.9%, up from 2.7% in May.
The headline index was held back by a 0.3% decline in the energy index. That was despite a 0.5-percent increase in the gasoline index, which was more than offset by declines in electricity and natural gas prices. Energy prices are up 12% versus a year ago, making them a key force elevating headline inflation. Food prices rose a modest 0.2% on the month, and are up only 1.4% year-on-year.
Core inflation rose 0.2% in June, in line with expectations. That lifted the year-on-year pace to 2.3%, up from 2.2% in May. Firmer prices for core services (+0.2% m/m) were behind the increase, as core goods prices were unchanged in June. Core services have been the main driver of core inflation in recent months, and are now up 3.1% versus a year ago. Core goods prices have also become a bit less deflationary in recent months, but are still down 0.2% year-on-year.
Delving further into the details, prices rose modestly for shelter (+0.1%), as costs for lodging away from home (-3.7%) reversed its May spike, leaning against higher costs for rent (+0.3% m/m) and owners’ equivalent rent (+0.3% m/m). Prices were also up for medical care (+0.4% m/m), new vehicles (+0.4%) and recreation (+0.2%). Leaning against these gains were lower prices for apparel (-0.9%), airline fares (-0.9%) and household furnishings and operations (-0.1%).
Key Implications
As expected by most forecasters, and the FOMC, inflation continued to march higher in June. There was little sign in the June data that inflation is accelerating on a monthly basis. Therefore, we expect the Federal Reserve to maintain its gradual pace of rate hikes over the coming months.
It is a little early to pick out evidence of import tariffs in the monthly CPI data. That said, we do expect import tariffs, both threatened and actual, to be a factor in higher inflation in the months ahead. The Fed is expected to look through the temporary impacts of tariffs on prices when looking at inflation. However, tariffs are a tax, and could become a drag on consumer’s purchasing power. That could lead to slower growth, and a slower pace of rate hikes than currently expected. For now, this remains a risk the Fed is watching.
