• Consumer prices rose 0.2% MoM and was up 3.0% YoY

• Core CPI rose a subdued 0.2% MoM and slowed to 4.8% YoY

• Core services offers real encouragement

• Core goods prices dropped 0.1%

• Weak inflation could temper Fed rate rises after July

The US consumer price index (CPI) inflation decelerated more than predicted in June, increasing investor conviction that the Fed may decide for only one more rate hike and then halt its tightening cycle.

Headline CPI inflation rose a modest 0.2% MoM in June. The yearly rate of inflation decelerated to 3.0% from 4.0% in the prior month, its slowest pace since March 2021 – and well off its peak of 9.1% last June. Some of the inflation slowdown over the past year has been driven by base effects, particularly for energy prices. The monthly uptick in headline inflation was driven by higher energy costs (+0.6%), including an uptick in gasoline (+0.8%) and energy services (+0.4% ). Energy index was down -16.7% YoY. Food prices rose a modest 0.1%. Grocery prices remained flat in June, down from 0.1% in May. The cost of eating at restaurants continued to rise, albeit more slowly, picking up 0.4% MoM, down from 0.5% in May. Food inflation has started to cool in recent months, bringing relief to consumers that have struggled to afford their grocery bills. Still, although prices are not rising as quickly as they were, the cost of food remains stubbornly high. On annual basis, food prices rose 5.7%, down from 6.7% YoY in May.

Stripping out volatile food and energy prices, core CPI rose 4.8% YoY, the lowest since October 2021 and 0.2% on a monthly basis, the smallest increase in almost two years. The more benign monthly print was helped along by goods prices resuming their retreat, dropping 0.1%. After back-to-back gains of over 4%, used vehicle prices fell 0.5%. New vehicle prices edged down ever so slightly (-0.03%), while recreational and household goods also declined in a sign pandemic spending patterns are slowly reverting and supply snarls continue to abate.

Price growth across services rose 0.3% MoM – a deceleration from the 0.4% MoM gains seen over the three-months prior. Core services are up 6.2% YoY. Prices for travel-related services tumbled 3.8% with notable declines in both airfare (-8.1%) and hotel prices (-2.0%). Gains in primary rent and owners’ equivalent rent also decelerated. A major contributor to the price growth in services remains rent, with both owners’ equivalent rent (OER) and rent of primary residence (RPR) notching sizeable gains of 0.5% MoM. That said, the much-anticipated slowing in shelter costs now appears firmly intact. Over the last three months, OER and RPR have averaged gains of 0.5% MoM. Price growth across non-housing services declined by 0.1% MoM, with the weakness concentrated in lodging away from home (-2.0% MoM) and education & communication services (-0.3% MoM). Recreational services (+0.5% MoM) was the only sub-category to report an acceleration in June.

Core goods prices (-0.1% MoM) also declined in June, snapping what had been three consecutive months of gains. Prices across household furnishings (-0.3% MoM), transportation (-0.2% MoM) recreational goods (-0.4% MoM) and education & communication goods (-0.1% MoM) were all lower last month.

Source: BIMB Securities Research - 13 Jul 2023