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  • Writer's pictureJason Tuvia

Core Inflation Cooling but Still High, Supporting Likely Fed Rate Hike

As we navigate the ever-changing economic landscape, understanding key indicators like inflation and housing dynamics becomes crucial. In this blog, we delve into recent data, their impact on various sectors, and what these trends suggest for the Federal Reserve's policies.

Inflation Takes a Step Back

Inflation, a hot topic in economic discussions, is showing interesting shifts. The consumer price index (CPI) climbed 3.0 percent year-over-year in June, marking the smallest increase since March 2021. A notable contributor to this trend is a significant 16.7 percent decline in energy costs. This drop in energy expenses has played a vital role in slowing the overall inflation rate to a third of its peak in June 2022. However, other consumer goods and services, such as housing and medical care, continue to rise in price. The core CPI inflation, which excludes more volatile components like food and energy costs, rose 4.8 percent year-over-year in June. Although lower than its peak of 6.6 percent in September 2022, core inflation remains elevated compared to historical norms.

Housing Impact on Inflation

Housing costs play a critical role in the inflation story. The shelter index, which monitors various housing expenses, remained a significant contributor to inflation, despite a slight softening from May. However, more recent data points to a gradual decline in pricing. For instance, while the median sale price of existing single-family homes surged by 16.5 percent in 2021, it only increased by 1.9 percent in 2022 and even declined year-over-year in May. Multifamily rents also experienced a slowdown, with the national average effective rent rising only by 1.5 percent in the first half of this year. This recalibration in residential markets reflects the intersection of demand, supply, and inflation dynamics.

Economic Signals from Energy Costs

Though not included in core CPI calculations, energy costs are a tangible budget item for households. Steady decreases in gasoline, oil, and gas utility costs from their 2022 peaks free up funds for other expenses. This reduction in energy costs could support household formations and increase consumer spending, benefiting both the apartment and retail sectors. Moreover, the travel industry could receive a boost, as affordable gas prices and lower airline fares encourage more people to embark on trips.

Federal Reserve's Focus and Future Implications

The Federal Reserve closely monitors inflation trends, with a specific focus on core inflation. The core personal consumption expenditures (PCE) index, a favored inflation measure for the Fed, was at 4.6 percent in May, significantly above its 2 percent target. While recent data might indicate a slowdown in core inflation, pricing pressures remain elevated. With a historically low unemployment rate of 3.6 percent driving above-average wage growth, there's mounting anticipation for a 25-basis-point increase by the Federal Reserve in its upcoming July meeting. If implemented, this would bring the overnight lending rate to a lower bound of 5.25 percent, the highest since March 2001.

In conclusion, the intricate dance of inflation, housing dynamics, and monetary policy continues to shape the economic landscape. These trends carry implications for various sectors, from real estate to consumer spending, and signal the Federal Reserve's ongoing challenge in balancing economic growth and price stability. As we move forward, keeping a close watch on these trends is essential for informed decision-making and preparedness in the ever-evolving financial world.

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