The June CPI report was a headline maker: inflation fell 0.1%. After years of rising inflation, the news can’t get any better than that. All sub-indexes of the consumer price index came in at the lowest levels in over three years. Year-over-year CPI rose 3.0% and core year-over-year was 3.3%. The lower inflation numbers were primarily driven by a long-awaited slowdown in housing costs. Both shelter costs and owner’s equivalent rent, the biggest component of CPI, rose at the smallest rate since 2021, 0.2% and 0.3%, respectively. Notable price declines were evident in new and used vehicles, airfares, hotel stays, apparel and inpatient hospital care. Services costs, excluding housing and energy, fell for the second month, a welcome relief after months of soaring prices. Yet, while costs of some categories may have fallen in June, the year-over-year change is still high. Admission to sporting events fell 0.2% in June but still 15% higher than a year ago. Auto insurance rose in June after a one-month slowdown but is up 19.5% from last year. Goods prices on average have continued to fall most of this year providing some relief to consumers – at least according to the numbers. If you ask anyone at a checkout counter, prices are still high, regardless of what the government data shows. Fortunately, the June inflation data may be what the Fed needs to move ahead with lowering interest rates. The truth is, though, a 25 basis points cut will do more psychologically than monetarily, but at least it will be one step closer to affordability.

Powell Comments – Federal Reserve Chair Jerome Powell spent two days this week explaining to members of the House and Senate the ins and outs, ups and downs, and whys and why nots of inflation. Through all the questioning, Powell kept to his mantra of needing to feel more confident that inflation is “moving sustainably towards the 2% target.” Powell acknowledged that recent inflation indicators have shown progress after a brief spike in the first quarter, but the committee is not yet ready to change policy. With inflation moving on the right path, the Fed’s focus now is turned to its second mandate, the labor market. Small but obvious cracks have started appearing in the labor force – weekly and continuing unemployment claims have been rising, the unemployment rate has increased for the past four months and the number of jobs added each month is falling. The Fed is very focused on achieving a soft landing and realizes the risks of keeping rates high for too long as well as cutting rates too quickly. In the end, Powell refrained from giving any concrete signals about when a rate cut would happen, but his emphasis on wanting to avoid too much cooling in the labor market was perceived to suggest a rate cut might happen in the coming months. After the June CPI report, the futures market began pricing in a 90% probability for a cut in September.

Consumer Credit – There is no doubt people are spending, even if at a slower pace than in 2023, but a good portion of the spending is being borrowed. Consumer borrowing increased $11.4 billion in May, the biggest jump in three months. Credit card debt accounted for most of that increase, jumping $7 billion, also the most in three months. It is becoming clear that the pent-up savings gained from the pandemic are being whittled down, likely due to higher prices. Household debt, including mortgages, rose to a record $17.7 trillion during the first quarter of the year.