The latest report on U.S. consumer prices has caused quite a stir, with the annual increase in inflation being the smallest in over two years. However, don’t be fooled by this seemingly good news. While energy costs have decreased, rents and the prices of used cars and trucks have continued to rise. Kavan Choksi warns that this indicates that underlying price pressures are still strong.
“The latest CPI figures in June 2023 show a moderate slowing in inflation, which provides the Federal Reserve with some room to pause its rate hikes this week,” explained Kathy Bostjancic, chief economist at Nationwide in New York. Although gasoline prices have dropped significantly, there is still the possibility of another rate hike in the coming months if economic data continues to surprise the upside. One thing we can take away from these numbers is that consumers benefit from lower energy costs, with electricity and utility gas declining for the third straight month. Monitoring inflation in the months ahead is important, as it could significantly impact the Fed’s decision-making in the coming months (source: REUTERS).
Food costs continue to play a significant role in our daily lives. Recent reports indicate that while some food products have become more expensive, others have experienced a price decrease. While fruits, vegetables, and nonalcoholic beverages have become pricier, meat and fish have become more affordable. Incredibly, the price of eggs has seen a drop of 13.8%, the largest since 1951. It may come as no surprise that dining out has become more expensive. Kavan mentions that the Consumer Price Index has risen by 4.0% as of May over the past twelve months, the smallest year-on-year increase seen in several months. This information is informative, but it also reminds us that while the cost of food may fluctuate, it remains an essential factor in our daily lives.
The annual CPI, which tracks changes in the prices of goods and services in the United States, reached a startling high of 9.1% in June 2022 – the biggest increase since the early ’80s. However, there’s reason to believe that the worst may be behind us, as the large rises from the previous year drop out of the calculation. Economists predicted a yearly increase of 4.1%, but the numbers ended up being slightly lower than anticipated, prompting relief from President Joe Biden and investors alike. Indeed, the response in the stock market was positive, with the S&P 500 and Nasdaq indexes hitting fresh one-year highs. Meanwhile, the dollar fell against other currencies, and U.S. Treasury prices rose. As we navigate these challenging economic times, we must remain optimistic and look for silver linings wherever possible.
A Promising Labor Market Faces a Temporary Hitch
The idiom “slow and steady wins the race” applies to the U.S. economy. Despite fears of a sudden slowdown, recent data suggests the market is doing well. In May, nonfarm payrolls increased with reassuring solidity, fizzling out concerns for a jarring drop. Of course, Kavan Choksi notes that the rise in unemployment is a bit of a red flag, but it’s important to remember that it’s coming from a low benchmark of 3.4% just last month. The real question now is whether or not the Fed should continue to raise rates to moderate demand. Many economists believe that pausing momentarily to assess current interventions’ effects could be a more prudent move. After all, gradual progress may not make for thrilling headlines, but slow and steady growth is ultimately more sustainable.
Amid economic uncertainty, some welcome news has emerged as overall inflation appears to be slowing down thanks to lower energy and food costs. After rising 0.6% in the prior month, commodity prices fell by 0.2% in May, bringing food prices back down to levels seen before Russia invaded Ukraine in February 2022. However, the situation remains tricky, as inflation has stubbornly remained well above the Federal Reserve’s target of 2% if we exclude the volatile categories of food and energy. The cost of services rose by 0.3% after enjoying 0.2% growth, with the cost of renting properties continuing to rise. But with the rental vacancy rate hitting a two-year high, analysts predict we could see a slowdown in rental growth for the foreseeable future. Despite these uncertainties, there are hopes that these recent fluctuations will pave the way for long-term stability in the months ahead.
Airline fares dropped by 3.0%, a welcome surprise for anyone who has experienced the pains of expensive travel bookings. On the other hand, services excluding energy rose by 0.4%, matching April’s modest gain. Furnishings experienced their first decline in nearly two years, with a 0.6% drop and the largest decrease since August 2009. Still, used cars and trucks saw a significant increase of 4.4%, contributing to the core goods prices rising for a second straight month. Economists are keeping an eye on the super core, a measure that excludes prices of food and energy, as policymakers place more emphasis on this measure in the Personal Consumption Expenditures price index data. These factors, combined with a predicted moderation in rents and declining prices for used cars and trucks in the future, point towards an overall slowdown in core inflation.
Kavan’s analysis of U.S. inflation helps bridge the gaps in understanding why prices can become ‘stuck’ at certain levels. The research also explains how central banks like the Federal Reserve System may effectively combat economic slowdowns caused by too high or too low inflation. It is important to note that while several factors are involved in determining the inflation rate over time, Choksi’s work adds valuable insight into the complex and ever-changing relationship between consumers and goods and services prices. Certainly, a continued exploration of such research could help us better understand how and why price inflations occur – which would greatly benefit individuals, business owners, and economies worldwide.
Kavan Choksi is a successful investor, business management, and wealth consultant. Working strategically with companies across fast-moving consumer goods, retail, and luxury markets — he leverages his vast experience to help clients turn around and revitalize their businesses.
With his expertise in economics and finance, Kavan has developed a passion for investing over the years and enjoys helping others do more with their money.
He provides thoughtful commentary to publications such as CNBC, Fox Business, Forbes, Business Insider, CEOWORLD Magazine, International Business Times, Financial Express, and The Epoch Times. Kavan is also a regular contributor to Nasdaq, where he shares his expert insights on what’s moving markets and the global economy.