Today could be historic for inflation watchers. It’s the first time since July 2022 that retail prices in June as measured by the U.S. Consumer Price Index (CPI) have declined.
It will be history making and effect the financial markets, housing, and maybe the presidential election where inflation has seemed to be Americans’ major worry—at least according to the polls.
The easiest signs of actual deflation for consumers are the drop of gas prices to pre-pandemic levels. Gas prices dropped 3.8% in June, the government said. And the cost of used cars and trucks fell 1.5%.
I said last month that it will probably be hard to believe for many scarred by the post-pandemic inflation scare that still believe inflation is too high, but there was no inflation increase in May for both wholesale (PPI) and retail (CPI) inflation indexes.
The FRED graph illustrates that we now have had two months of no price increases. It could have been predicted because consumers have known for months that stores were discounting, and been frequenting big box retailers like Target, Walmart and Costco.
It also tells us that housing (rents) have been declining after an initial uptick in the first quarter due to various shortages. Housing inventories have increased some 40 percent year over year, per the National Association of Realtors.
This will cause bonds in particular to rally because interest rates, including mortgages, will finally begin to decline from their two-year highs.
San Francisco Fed Chairman was the first to jump on the rate cutting bandwagon this morning. She said she now supports cutting interest rates.
“With the information we have received today, which includes data on employment, inflation, GDP growth and the outlook for the economy, I see it as likely that some policy adjustments will be warranted,” Daly said in a roundtable with reporters cited my MarketWatch’s Greg Robb.
The increase in rents in the past 12 months slowed to 5.1% in June from 5.3% in the prior month and touched the lowest level since April 2022. Rents are expected to slow even further, but just how much is unclear. Before the pandemic, they were rising about 3.5% to 3.9% a year.
The cost of "imputed" housing, meanwhile, rose a scant 0.3% in June. That's the smallest increase since July 2021. This category, known to economists as OER, is a indirect proxy for how much the cost of housing is rising.
The Biden administration’s Treasury Department is doing its part with funds to support building more affordable housing.
“Executive agencies have the power to act quickly to promote homeownership. We applaud the Biden Administration’s comprehensive, multi-agency response targeting solutions at every level of government. It will take an all-of-government approach to yield results in this fight,” said NAR’s Chief Advocacy Officer Shannon McGahn.
So, Fed Chair Powell was correct in saying at his latest congressional testimony that the Fed will not have to wait for inflation to decline to its 2 percent target rate before cutting interest rates
He was making a brave statement, because the inflation hawks will now say easing credit could stimulate another inflation surge, because consumers will therefore be able to borrow more, thus increasing the demand side of the supply-demand equation.
But lower interest rates will also stimulate more home building, increasing the supply side of the housing shortage that has kept most housing unaffordable for entry-level and first-time homebuyers.
The rather sudden drop in prices could mean more, maybe economic growth itself slowing further, and we see actual deflation? Let’s wait and see.
Harlan Green © 2024
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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