June CPI Marks Progress Along the Last Mile to Inflation Target

Federal Reserve policymakers closely watch core inflation data for signs of cooling, and June offered a second straight month of surprisingly low readings in the core Consumer Price Index (CPI). It rose just 0.06% in June, the softest pace since January 2021, meaning core inflation is now running at 3.3% year-over-year (according to the U.S. Bureau of Labor Statistics). A key detail was the step down in shelter inflation, which has been a major driver of above-target inflation thus far.

The shelter data, along with recent employment data – in particular the return to pre-pandemic levels in the ratio of job vacancies to unemployed workers – could give Fed officials greater confidence, and potentially tee them up in September to begin what will likely be a series of rate cuts.

Looking at the overall CPI data and trends, we don’t believe June’s 0.06% core pace is likely to be the new average monthly pace going forward. Shelter inflation appears to have stepped down to a slower pace, but more volatile categories such as travel services and car prices are unlikely to continue to drop this much, and shipping costs could lead to higher goods prices.

Taking a step back, since 2022, we’ve argued that the last mile of the U.S. inflation journey back to 2% (the Fed’s target) was going to be the slowest. However, a cooler labor market, as well as a slowdown in immigration that eases some of the inflationary pressure in housing markets, should help narrow – or even eventually close – the gap between the current inflation rate and the target. We believe June’s inflation report was an important step along this last mile.