June CPI report shows inflation slowing, here's what it could mean for Fed rate hikes

[00:00:00] Speaker 1: Well, inflation continued to cool in June, rising at the slowest annual rate since March of 2021. Year over year, we saw core CPI rise just 3%. Joining us now, we've got Jens Norvig, who is the Exante Data, Inc. founder and CEO. And we've got Stephen Juneau, who is the Bank of America Securities U.S. economist. Gentlemen, thanks so much for taking the time here with us today. Jens, you're here in studio with us. So I'll go to you first on this. As we think about the headline figure that we saw, does this move the needle at all with the Fed, given that we've just had the meeting minutes not too long ago kind of spell out exactly how their tenor already was coming into not just this data, but also the next meeting, too? [00:00:43] Jens Norvig: Yeah, so I think in terms of the next Fed meeting, it's almost like the Fed is locked in. I don't think they're going to change their opinion about that. But really what matters for market is what the trend looking a little bit further ahead. And I think this number today is a very important number, right? We have had a huge debate about how sticky services inflation is going to be. And it's most of the services that drives the core number, right? And this is the first reading we've had that has been less than 0.3 on the month for almost two years. And actually, if you look at the unrounded numbers, this number was close to 0.1. So this is a new situation. We've already had goods prices being very low. In fact, no goods inflation for the last three, four months, right? So if we also have the services prices starting to show some moderation, it's a very big deal for the Fed. So I think July is almost a given, right? But all that expectation that the Fed might continue to go beyond July, that is now in question, like you said. [00:01:47] Speaker 3: Yeah. Stephen, I want to bring you into this. I mean, again, just to put a fine point on this, finally, right? It feels like this is finally cracking, that we are finally getting a little bit of relief. Put that in perspective for us. Like, how relieved should we be? Is this – should we believe this? Is it actually slowing down? [00:02:09] Stephen Juneau: Yeah. Well, first of all, thanks for having me on. And I would absolutely agree. We're finally getting kind of those softer prints. We're seeing that progress being made on the inflation front. As Ian's noted, we did see core goods, ex-use cars. We've seen that flat for the last three or four months. I believe on a three-month annualized rate, it's basically at 0.2. I mean, that's pretty impressive. I mean, it's not the deflation we were hoping for, but it is significant disinflation. We were running at 4.7% annualized in the first quarter. So that's really a big improvement. And you're also seeing shelter come down. You're seeing rent prices moderate. You're seeing OER come down. That was expected, right? You've seen that in the asking rent data. It's going to continue to evolve, continue to be a downward force on the inflation data. And now you also have used car prices falling. That was a big thing, right? The last two months were marked by used car prices increasing by 4% month over month or more. And now you get that 0.5% month over month drop, and you're likely going to see bigger drops coming in the coming months. And that's going to put further downward pressure on core. So I agree. I mean, some of these things may not repeat, right? They may not be as big. Airfares was a big decline. But I agree. This is a very soft report. We saw a lot of things to like. And we're seeing a lot of progress on the inflation front. And that's a continuation. You know, the last two months were marred by idiosyncratic factors. And now we're seeing those kind of fade a little bit or really reverse and kind of push it down the opposite way. [00:03:40] Speaker 1: Steven, just as you were mentioning housing a moment ago, I want to kind of help make sense of this a little bit more, perhaps for my own edification and even that of some of our viewers as well. Because we were talking earlier about how housing prices has accounted for 70% of the year-over-year increase and yet coming down. So perhaps you could just help us break that down a little bit more. [00:04:01] Stephen Juneau: Yeah, so you have to realize housing is the biggest component of the CPI basket. So it's always going to have an outweighed influence on the overall numbers. So that's what's been happening. But it's also lagging indicators. So the way CPI does rents is it doesn't reflect what's really going on on the ground floor, what's happening to someone who's taking on a new rent today. And what we're seeing in terms of what people are facing in terms of new rents and what we've seen in progress there over the last six, nine months is that new rent inflation, asking rent inflation, is really moving lower. And what that means is that it's eventually going to catch up in the CPI data. We're seeing that already. We saw that step down in shelter inflation. We saw that continue this month a little bit. It's running at about a 0.4, 0.5% annualized pace or 0.5% month over month pace, rather, instead of that 0.7, 0.8% pace that we saw to start the year. But now we're seeing that step down. And we think that progresses just given what we're seeing and asking rents. And again, it's a big share. It's the biggest component of the CPI basket. So as that comes down, we're going to see core CPI come down a little bit more. We're going to see headline come down a little bit more. And we should see inflation continue to moderate a little bit over the course of this year. [00:05:24] Speaker 3: Jens, I want to linger on shelter inflation a little bit. And this is a conversation that's been going on for a little while now, that it's a pretend number, right? Owner's equivalent rent is something that is sort of made up. It's like, what would you be paying if you were renting the property? But should we just, like, do we just have to live with it at this point? Like, the Fed doesn't seem to be, the BLS doesn't seem to be, they don't seem to be moving away from this measure, right? [00:05:52] Jens Norvig: No, I think the Fed is aware of this lag. Like, Powell has been very explicit that he knows that there's some kind of lag to process there. And also the specific, you know, everybody have their favorite breakdown of the CPI report, right? And Powell has a breakdown where he strips out those measures and looks at other core services, right? So in terms of policy, they're going to look at this holistically, right? And now we clearly have some improvement. And even if there's that lag, they're going to see increasingly through that. So I think it's a very important turning point. And it's going to ease, like, those people who are extremely concerned about very persistent services inflation, they're going to be less worried. And I think the other thing I would say is that inflation expectations really have been under control for quite some time. Like, obviously, two years ago, the Fed was clearly behind, but they got kind of up to speed and inflation expectations will never worry, right? So, like, the argument for the Fed going extremely aggressively is that they're somehow, like, way behind the curve, right? Our inflation expectations are going bananas. That's not the case, right? So I think there's a situation where the Fed can say, okay, we've tightened a lot. We're going to do one more in July, and then we're probably going to take a break now. So this number makes that much, much more likely than before. [00:07:21] Speaker 3: So I'm feeling not bad out of all of this. Jens, you're going to stick around. Steve, thank you so much. Stephen Juneau, Bank of America Securities, U.S. Economist, appreciate it.