Key Points
-
While inflation had been expected to slow due to declining energy prices, the June CPI report exceeded economists’ expectations.
-
This data should allow the Federal Open Market Committee to continue to take a wait-and-see approach.
-
It may also make it easier for Fed Chair Kevin Warsh to implement some of his desired changes at the Fed.
- These 10 stocks could mint the next wave of millionaires ›
Kevin Warsh has become chair of the Federal Reserve’s Board of Governors during a time when the agency is grappling with how to rein in inflation without tipping the economy into a recession.
Now, Warsh is getting some help.
The Consumer Price Index (CPI), which tracks the prices on a basket of consumer goods and services, fell a seasonally-adjusted 0.4% in June, the largest decline seen in six years.
The headline year-over-year CPI clocked in at 3.5%, down from 4.2% in May.
While a soft CPI had been expected, due to declining energy prices in June, both numbers came in lighter than economists had expected.
Furthermore, core inflation, which strips out more volatile food and energy prices, was flat in June and up 2.6% year over year. Economists had projected increases of 0.2% and 2.9%.
It’s all great news for Warsh. Here’s why.
Official White House photo by Daniel Torok
The Fed has more time
In June, the energy category fell 5.7% from May. Within, gasoline prices fell 9.7%.
Still, there were declines in other categories. Used car prices declined 0.2%; apparel fell 0.6%; and medical care commodities also declined 0.2%. Additionally, the rent index increased by only 0.1%, and lodging away from home fell by 2.3%.
“June finally brought some relief on inflation,” Heather Long, chief economist at Navy Federal Credit Union, said, according to CNBC. “This takes the pressure off the Federal Reserve and allows the central bank to wait and see what happens. The concern is that this relief will be short-lived as the war in Iran re-starts. It’s too uncertain to know how the inflation story ends.”
Following the inflation data, the likelihood of the Fed holding rates steady at its meeting later this month surged from roughly 58% yesterday to 88%, as of this writing.
While the market is still pricing in a rate hike at the Fed’s September meeting, the odds of the rate-setting Federal Open Market Committee (FOMC) leaving rates unchanged in September jumped from about 25% yesterday to over 40%, as of this writing.
Keep in mind, these percentages change frequently.
US Consumer Price Index MoM data by YCharts
The focus now turns to the Fed’s July meeting
Since becoming chair, Warsh has spoken in a quite hawkish tone, repeatedly saying that the Fed will get inflation under control.
However, Warsh has also previously spoken about viewing inflation through a different lens and has created a task force to examine how the Fed views inflation.
Specifically, Warsh has said he is interested in viewing inflation through a “trimmed averages” approach.
This approach goes beyond core inflation by ranking price changes in an index from smallest to largest, then eliminating the most extreme movements before taking a weighted average.
Measuring inflation in this manner would certainly make it look closer to the Fed’s 2% target than measures such as the CPI or the Personal Consumption Expenditures Index.
While it doesn’t look like Warsh plans to ignore current affordability issues in the country, I do think this recent inflation report would allow him to make a case that inflation is slowing, which it very well might be.
Now, if the Iran war, which has recently re-escalated, continues and the Strait of Hormuz remains closed, inflation is likely to pick back up.
However, I don’t think the Fed will want to hike interest rates solely on account of the war unless it feels it has no choice.
Overall, this report gives the Fed more time to wait and see, which is good news for Warsh. Furthermore, it potentially gives Warsh more latitude to implement some of the potential changes he has discussed as part of his regime change at the Fed.
Where to invest $1,000 right now
When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 918%* — a market-crushing outperformance compared to 209% for the S&P 500.
They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.
The Motley Fool has a disclosure policy.
