Another downside surprise in U.S. June inflation

  • In June, headline CPI growth in the U.S. edged down to 3% from 3.3% in May. That’s below consensus expectations and marked another downside surprise after May.
  • Details generally looked at least as soft for price growth as the headline would suggest with the breadth of price growth across products narrowing and the Fed’s preferred core services ex-rent component (‘supercore’) declining for a second straight month.
  • That closely watched supercore measure posted a second consecutive outright decline (-0.04% in May and -0.05% in June) to leave the three-month annualized basis down to 1.3% in June. That’s the slowest reading since October 2021 and just half of the pre-pandemic run rate of 2.6%.
  • The easing among core services components was also widespread, with transport and education services seeing monthly declines from May. In June, just under half of the CPI basket (excluding shelter) saw three-month annualized inflation reading above 2%, comparing to 60% three month ago.
  • Energy CPI dropped lower to 1% in June upon a second monthly decline in gasoline prices. Food CPI was little changed at 2.2%, as slower reading for grocery CPI (1.1%) continued to balance off still elevated inflation for dining out (4.1%).
  • The broader ‘core’ CPI excluding food and energy also dropped to 3.3% above last year after a smaller 0.1% monthly increase from May. That’s in part thanks to a long-anticipated slowing in the home rent component. In June, rents grew by 0.2% from May, the slowest reading in almost three years.
  • In the future, we continued to expect further moderations in rents CPI after a long lag behind slowing in market posted rents that gradually filter through to average rents as leases are renewed.

    • Bottom line: A second U.S. CPI downside in a row in June has added to market odds for a first rate cut from the Federal Reserve this September. That’s also building on a weaker round of employment data last week that showed persistent unwinding in tight labour market conditions. From the Fed’s perspective, these are all data prints that they would like to see at this stage to confirm that interest rates are working to cool inflation pressures sustainably and to realize their dual mandate. Powell has always communicated the Fed’s decision making as a risk-management process, but also reiterated in his congressional testimony this week that there are downside risks to the economy and labour market from rates being restrictive for too long. After today’s CPI report, we think an interest rate cut at the Fed’s next meeting in July is still unlikely but the odds are tilting towards a September cut.

  • Lower energy costs contributed to most of the slowdown in headline price growth, but indicators of broader inflation pressures also surprised on the downside.
  • The Fed’s preferred inflation measure – core services ex-rent slowed sharply for a second consecutive month (back to below the Fed’s 2% inflation objective on a 3-month rolling average basis) after worrying upside surprises earlier this year.
  • The diffusion index, measuring the breadth of price pressure, showed significant improvement in June with the share of products seeing 5%+ inflation back at pre-pandemic levels.
  • Softening labour markets (with the ratio of jobs to workers normalizing) is easing wage pressures and makes slower inflation look more sustainable.

    • See our Canadian Inflation Watch here.
    See the archived editions of the RBC U.S. Inflation tracker here.

    • Headline CPI growth ticked lower on slower growth in core (excluding food and energy products) prices.
    • Fed’s preferred core measure improved again on a three-month rolling average basis but remained at rates above the target range.
    • The scope of inflationary pressures looks virtually unchanged from last month on a 3-month rolling average basis.
    • Price growth for both groceries and dining out have slowed to pre-pandemic levels.
    • Consumers’ inflation expectation in the next year started to drift higher.

    • Headline price growth was little changed from last month, edging down to 3.4% from 3.5% in March on slower price growth excluding food and energy products
    • Core services ex-rent inflation slowed (slightly) after three larger monthly jumps.
    • The diffusion index – measuring the breadth of inflation across products, improved slightly in April.
    • April’s payroll report indicated some further softening in wage growth, suggesting that inflation pressures coming from tight labour markets are easing.
    • But there are more items in the CPI basket that remained sticky.

    • An increase in energy prices pushed year-over-year headline price growth higher in March.
    • But “core” (excluding food & energy) price growth unexpectedly held steady at 3.8%, with underlying details adding to signs of reacceleration in underlying price growth to-date in 2024.
    • The breadth of inflation pressures has begun to widen again after narrowing last year – the share of the consumer basket growing faster than 5% (annualized) over the last three months increased to 33% in March from under 20% as of November last year.
    • There are still reasons to expect price growth to slow going forward – home rent CPI growth should continue to slow as market rent growth has declined sharply from the peak in early 2022, wage growth and consumer inflation expectations have both been slowing.
    • Still, the higher breadth of inflation will be worrying for U.S. monetary policymakers, with Fed officials already showing signs of waffling over the when to start (and how much to cut) interest rates this year.

    • Headline inflation edged higher to 3.2% in February with energy price edging higher (but still below year-ago levels).
    • Core inflation (ex. Food and energy) rose a larger than usual 0.4% from January but slowed to 3.8% on a year-over-year basis.
    • Growth in the Fed’s ‘supercore’ ticked up on three-month rolling average basis but the breadth of inflation pressures narrowed slightly by our count.
    • Much of the core price growth is still driven by home rents, but that is expected to moderate as earlier slowing in market rent growth passes through to leases with a lag.
    • Goods prices are outright declining (from a year ago), while service price growth is still firm.

    • Headline year-over-year price growth slowed to 3.1%, but underlying pressures showed signs of reacceleration.
    • Most of the slowdown in headline price growth came from lower energy prices, but grocery price growth inched up from a month ago.
    • Home rent growth continued to be the main driver of price growth but the breadth of inflation pressures widened in January.
    • The Fed’s closely watched core (services ex. rent) component surged to 6.7% (3-month annualized change), the highest since June 2022.
    • And robust labour markets and wage growth acceleration in January will leave the Fed concerned that inflation could heat up.

    • Shelter services was driving most of U.S. inflation pressures by the end of 2023.
    • Price growth among goods dropped below 0% (on a 3-month annualized basis); Grocery inflation also eased further.
    • Overall, the breadth of inflation pressures in the U.S. has normalized to a level similar to pre-pandemic.
    • But bond implied inflation has settled at levels that are above pre-pandemic.

    • Inflationary pressures showed further signs of easing in November, with the breadth of inflation pressures continuing to narrow.
    • The decline in energy prices pushed headline CPI growth down to 3.1% year-over-year.
    • Core inflation remained steady at 4% year-over-year, still well-above the Fed’s 2% target. But a 0.3% one-month increase from October extended a string of more moderate recent price increases with over half the one-month rise accounted for by higher home rent.
    • Near-term inflation expectations are still high, and the Fed’s ‘supercore’ (services ex-home rent) is still elevated.
    • But softening wage growth makes it more likely that moderation in price growth will persist into next year.

    • Reduced energy and food costs brought headline inflation down, but core price pressures also eased.
    • The Fed’s favored inflation gauge posted a small (0.2%) increase in October but is still high over the last three months
    • Still, the breadth of inflation pressures showed signs of moderating
    • Slowing labour demand, leading to moderated wage growth.
    • A drop in rental market rate foreshadowed a further dip in Rent CPI.

    • The substantial easing in broader U.S. inflation pressures in prior months took a step back in September
    • Prices for gasoline continued to rise on higher oil prices, albeit at a slower pace
    • Growth in the Fed’s preferred inflation measure (core services excluding rent) surged to 4.8%, in part on higher hospital costs
    • Food inflation eased again, with growth in cost for dining out still outpacing groceries
    • The breadth of recent inflation pressures widened slightly, although is still substantially narrower than a year ago

    • Elevated oil prices pushed U.S. energy prices higher.
    • But broader inflation pressures have continued to ease south of the border.
    • Rent, one of the main contributors to inflation, has slowed on a month-over-month basis.
    • And excluding rent, the U.S. Fed’s preferred ‘core’ inflation measure still-below pre-pandemic trend levels.
    • Wage growth remains stubborn at 5% to 6%, despite an easing in overall price pressures.

    • Broader price pressures are still trending down despite an energy-driven uptick in annual headline inflation in July.
    • Month-over-month growth in core services ex-shelter (a preferred Fed measure) ticked higher but still at low level, and the breadth of inflation narrowed significantly.
    • Consumers expect slower price growth over the next 5 years, but their short-term inflation expectations remain unchanged.
    • Real wages are still growing—though they continue to lag inflation growth.

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