It looks like inflation may finally be contained at a manageable level for the first time since prices for consumer goods began rapidly rising during the onset of the pandemic.
As of the latest report, inflation is lower than it has been over the last couple of years, with a year over year increase of just 3% from June of 2022 to last month. In fact, when relatively volatile food and energy prices are excluded from the calculation, core inflation is currently at an annualized rate of about 2.4%. It’s also worth noting that these figures are down markedly from the 3.8% average annual inflation that the US clocked from 1960 through 2022.
That said, 3% year-over-year inflation remains above the Federal Reserve target threshold of 2%, so there is still a strong possibility that our central bankers will choose to implement another interest rate hike this year - especially if the job market continues outperforming expectations - but a growing number of economists believe the Fed may forgo another rate increase in the short term, and these inflationary numbers will certainly add weight to that argument. After 5 points of rate hikes since March of last year, the possibility of a reprieve on interest rate increases - conceivably through the remainder of the year - was very positively received by Wall Street, which saw a surge in stock and bond prices as a result.
There are a number of factors that are contributing to bringing inflation down, including falling food prices, which had spiked when Russia invaded Ukraine last year but have largely normalized as alternative sourcing and development have scaled. While grocery prices are still rising, to be sure, they are doing so at a much slower pace, and some types of groceries, including eggs - which notoriously ballooned in price in recent years - have come down substantially from their price peaks.
Another inflation calming factor has been a reduction in apartment rental rate, largely as result of increased supply from all the additional housing construction that has taken place recently. Used car and airline ticket prices have also come down.
Even with inflation down at or below normal levels over the past year, however, not all consumer goods and services are seeing price increases invert or even slow in some cases. The cost of eating at restaurants, car insurance, childcare services, and even dental work are some of the areas where consumer prices continue to climb rapidly. Car insurance policies, for example, saw an average 17% increase from the year before.
Perhaps as a result of some of these prices that continue quickly rising despite a major drop in overall inflation, consumer sentiment is lower than it has been in 83% of the last 45 years. On net, however, consumers are in a much better position with regard to consumer goods prices than they were a year ago, even if the impacts of the rapid inflation, which go well beyond price uncertainty, remain actively in their minds.
The Fed will meet again at the end of this month, and for a time it had been largely expected that another quarter point rate increase was in store, but these inflation numbers may well make that particular conclusion significantly less foregone.
You can read more about the latest inflation report here.
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