Last week, there was widespread celebration as it was announced that the headline Consumer Price Index (CPI) for the month of June had come in at 3 percent. This represents the lowest level of overall price level growth since March 2021, leading many in the financial media to proclaim that the United States has entered a period of “disinflation.” The previously unpopular term “transitory” has made a comeback in discussions about inflation.
However, it would be premature, and possibly misguided, to declare an end to inflation based solely on this reduction in headline CPI. While it is certainly a positive development, core inflation, which excludes volatile energy and food prices, remains stubbornly high at nearly 5 percent. Moreover, overall price levels have actually increased by almost 20 percent since June 2020. Until both core inflation comes down and wages catch up with the higher overall price level, inflation will continue to be a persistent problem.
The slowdown in headline CPI over the past year has been largely driven by a sharp decline in energy prices compared to last summer. However, prices for many goods and services continue to rise at an alarming rate. For example, in June, transportation prices increased by 8.2 percent, shelter prices by 7.8 percent, and food and electricity prices by 5.7 percent and 5.4 percent, respectively. Motor vehicle insurance prices have seen an astonishing rise of 16.9 percent since last year.
Even when excluding energy and food, core CPI remains high at 4.8 percent growth in June, following a 5.3 percent increase in May. The Federal Reserve acknowledges that there is still a long way to go before they can declare victory over inflation.
Despite the recent decline in energy prices, the overall cost of living has increased significantly. Fuel oil and gasoline prices are still 82 and 71 percent higher than they were in June 2020, respectively. Utility gas and electricity costs have risen by 30 and 24 percent. Used car prices remain 47 percent higher, and overall food costs have increased by nearly 20 percent. The cost of shelter, which accounts for a significant portion of household spending, has risen just under 17 percent. In essence, all the essentials that consumers need – food, shelter, transportation, and energy – remain prohibitively expensive.
There is some positive news, however. Wage growth is accelerating as workers demand higher pay from their employers. Nominal wage growth for June 2023 was 5.6 percent, exceeding both headline and core CPI. However, wages still have a long way to go to catch up with three years of inflation. Since June 2020, nominal wages have grown by 16.3 percent, while headline CPI has grown by 18.4 percent. Those who changed jobs managed to increase their wages by 18.7 percent, while those who stayed with the same employer saw nominal wage growth of only 15.3 percent.
Interestingly, it appears that the United States is exporting inflation to Europe, which is more directly affected by the Ukraine conflict, and absorbing goods deflation from China. These factors seem to be contributing to the moderation of overall price levels in the United States.
In conclusion, before the Biden administration can confidently announce the end of inflation, several conditions must be met. Core CPI needs to decrease, wages must catch up with overall price levels without causing another round of price increases, and the United States must avoid a return to energy-driven inflation. Although crude oil prices have risen by 10 percent in July, they remain below $80 per barrel and well below last summer’s high of $100 per barrel. Therefore, they currently pose no significant inflationary threat unless there is an external event that shocks the market. The biggest risk to energy prices continues to be the war in Ukraine and China’s ability to stimulate economic growth. As of now, it is highly likely that the Federal Reserve will raise interest rates by 0.25 percent when the Federal Open Market Committee convenes later this month.
Note: The views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
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