The Line: Consumer Prices Fell More than Expected in June

Today, we have some great news on inflation. Enjoy it while it lasts.

The consumer price index declined by 0.4% last month, beating the consensus forecast of a 0.1% dip. This was the largest monthly decline in consumer prices in over six years. Over the past year the CPI was up 3.5%, which was lower than the 3.8% rate economists were expecting.

Why did the CPI post such a large monthly drop? Energy prices, and specifically gas prices. Last month, gas prices fell 9.7% after rising 21.2% in March, 5.4% in April, and 7.0% in May.  Unfortunately, the decline in gas prices may be short-lived now that the war is back on in Iran.

Core CPI, which removes food and energy prices, was flat in June and just 2.6% higher than a year ago. Both those figures were below forecast.  Housing prices, which had been responsible for the bulk of the increases in CPI over the past few years, rose just 0.1% in June. In other good inflation news, the producer price index fell 0.3% last month.

While the core personal consumption expenditures price index (PCE) is the Fed’s preferred measure of inflation, the June CPI and PPI reports have lowered the expectation of a Fed rate hike in the coming months. Unfortunately, the restart of attacks on Iran could change that if a ceasefire doesn’t happen soon.

Chair Kevin Warsh told Congress this week that the Fed will get inflation under control, which would help consumers and give a needed boost to the housing market. For those who are concerned that Fed hikes will bring mortgage rates higher, you need not worry. Getting inflation near 2% would certainly bring down 30-year mortgage rates, which reached their highest level in almost a year this week even though the Fed hasn’t raised rates in three years.

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