The June CPI Report Will Carry A Big Message On Inflation’s Path

The June CPI report is expected to show a very modest uptick from May’s weaker-than-expected reading. Analysts forecast for headline CPI in June are expected to show a month-over-month increase of just 0.1%, up by 0.0%, while rising by 3.1% y/y, down from 3.3%. Meanwhile, core CPI is expected to increase by 0.2%, in line with May, while rising by 3.4% y/y, also in line with May.

As of this writing, CPI swaps are pricing in a 0.0% month-over-month change in headline CPI for June and an increase of 3.1% year over year. This estimate fell sharply following the May CPI report but has held relatively steady and consistent throughout the past month.

Energy and Auto Insurance Drove A Weaker May

Expectations plunged following the May weakness across several sectors but were driven mainly by weaker energy prices and, for the most part, lower gasoline prices. Also, airline fares fell sharply in May, dropping by 3.6% m/m. Additionally, after many months of rising sharply, auto insurance rates suddenly plunged in May and fell on both a seasonally and non-seasonally adjusted basis. This decline significantly impacted the month-over-month rate of change, considering that auto insurance has a 2.9% weighting in CPI. So, the auto insurance data for June will have a big say on whether the overall weak May reading was the start of a new trend or a one-off.

Shipping Rates Continue To Climb

However, shipping rates continue to rise in price, as measured by the WCI Composite Container Freight Benchmark, which has increased to its highest level since August 2022. So far, this move higher in container rates has not been visible in the cost of goods. The CPI Commodities Less Food & Energy Commodities Index has been trending sideways since the fall of 2021, and over the last three months, we have seen the m/m rate of change creep higher, climbing to the reading of 0.0% in May, which was up from -0.1% in April, and -0.2% in March. Again, rising shipping rates continue to threaten goods inflation’s revival.

Housing Near A Bottom?

Additionally, CPI Owners’ Equivalent Rent of Residences is another piece of the equation that may determine when and where inflation is heading and whether the path set up in May will stick. The owner’s equivalent rent tends to follow the Case-Shiller year-over-year change in home prices. The data for Case-Shiller shows that home prices bottomed sometime in the spring of 2023 and then turned higher. The bigger unknown is when and where the owners’ equivalent rent will bottom because, based on the timing of previous bottoms, the CPI’s OER tends to bottom about 18 months after the Shiller data bottoms, and based on current trends, the CPI OER could be within a couple of months of a bottom.

At its current pace, it could be that the bottom is not that far away, but again, the data in June will be essential to determine whether that path of disinflation is still in progress or if the bottom in owners’ equivalent rent is much closer than thought. At least when looking at the non-seasonally adjusted index value, we can see that the annualized rate for the one-month and two-month values have turned higher but remain below the 12-month rate of change, but are suggesting a bottom around 4.5 to 5% may be near, which would be higher than 3% to 3.5% pre-pandemic.

While June CPI is essentially seen as a non-event based on current analysts and market estimates, the report will provide important information about whether the trends witnessed in May were the start of a new, slower trend or were a one-off in a much more persistent, higher path for inflation.

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