June CPI Report Underscores Economic Fragilities

Consumer prices were firmer than widely expected in June, but underlying softness in the report was a stark reminder that the U.S. economy remains fragile and that more stimulus will likely be necessary to support the recovery.

The headline consumer price index (CPI) increased 0.6% month over month in June, boosted by a rebound in energy prices – a strong result after several months of declines. The core index, which excludes the volatile food and energy categories, was also firm, rising 0.24% over May – after dropping for three consecutive months. The categories that contributed to the June price recovery, including travel services and some retail goods, were the same categories that were hit particularly hard by government restrictions on mobility. And, overall, the rebound confirmed that more lenient social distancing measures boosted economic activity as well as prices.

However, the underlying details in the core CPI index were softer. Shelter price gains recorded one of the softest increases since 2010. And although one never wants to over interpret any one print, the June performance suggests that still-high unemployment and rising rental nonpayments may have started to weigh on shelter inflation in June.

Underlying weakness

Notwithstanding the rebound in some goods and services prices, the details of June CPI report serve as a reminder of the lingering underlying weakness in the economy. Similarly, recent data have shown that a notable recovery in employment, spending and manufacturing activity occurred in May and June, but the rebound has recuperated only a fraction of the larger contraction in March and April. Similarly, the unemployment rate has recovered from a 14% peak in April, but at 11% remains above the highest level reached in the wake of 2008 financial crisis.

What's more, the outlook has deteriorated somewhat further recently, as another outbreak of the novel coronavirus – this time in the southwestern and south Atlantic regions of the U.S. – has raised questions about the extent to which the recent rebound will continue. New cases, hospitalizations and deaths have risen in several states, increasing the likelihood that tougher economic restrictions (in addition to mask mandates) will be necessary to control the spread. Just this week, California reinstated tougher restrictions on business activity across several counties in the state that make up around 10% of U.S. GDP. In any case, consumer and business behaviors appear to be shifting ahead of more possible restrictions. According to Opportunity Insights, small business revenues and consumer spending have deteriorated recently, and have deteriorated more in the states with the most acute outbreaks.