For a second month in a row, the Bureau of Labor Statistics has provided evidence that inflation has actually and meaningfully begun to slow for the first time since last year. After holding constant in May, the consumer price index in June actually fell by a tenth of a percentage point, bringing the CPI inflation rate for the past 12 months to 3%, the lowest point since June of last year, but still a full point above the Federal Reserve‘s maximum 2% inflation target.
It’s a real bit of good news, but contrary to the media spin, it’s only the second consecutive month of good news. While investors have sent the odds of a September rate cut soaring, Treasury’s futures are once again getting ahead of themselves. Data like that from May and June are necessary but far, far from sufficient to prove the worst inflationary crisis in 40 years has truly approached its denouement.
For starters, much of the deflation — that is, the actual decrease in prices rather than the mere slowing of the rate of inflation — comes from a handful of atomized sources. Energy prices have fallen by 4% in the past two months, and gasoline, in particular, by 7.4%. And while core CPI, which rose by 0.1% last month, technically doesn’t include the volatile categories of food and energy, that decrease in gas prices does trickle down to transportation services, the only major core CPI category to experience deflation other than the auto market (which we’ll get to in a minute).
The fall in gas prices was a result of a seasonally anomalous drop in consumer demand as well as President Biden artificially flooding the market with a million oil barrels from a government reserve in anticipation of potential 4th of July headlines. But according to AAA, the reprieve was temporary: Gas prices are already back on the rise.
The auto market continues its free fall, a product of supply chains recovered from the pandemic and demand thoroughly exhausted by the consumers who raced to buy flashier and fancier vehicles with their stockpile of cash saved from stimulus checks and unspent wages during the peak of the 2020 lockdowns.
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The Fed has two major reasons not to pounce on this data just yet. First and foremost, it’s simply not enough time to prove this disinflation will last, and second, service prices, the stickiest portion of the quotient, remain too hot. And while the BLS does believe that shelter inflation slowed last month, my friend E.J. Antoni provides a compelling counterpoint that the BLS underestimates the actual housing inflation realized by consumers.
We do have two consecutive months of the sort of unadulterated good news that doesn’t require contorting or perverting the data to make it prove a positive point. But two months don’t prove a trend, and once again, investors are only seeing what they want to see.