June 2017 Consumer Price Index

Prices paid by Americans were virtually unchanged in June 2017 according to the Consumer Price Index (CPI) from the Bureau of Labor Statistics. This measure of inflation has been weak lately, posting a gain in just one (April +0.2 percent) of the past four months. After a near-term peak of 2.8 percent in February 2017, the year-over-year trends have been decelerating, increasing just 1.6 percent in June at the headline. Core inflation, which removes food and energy, experienced a year-over-year peak of 2.3 percent in August of 2016, and this reading is now just 1.7 percent.

Details within the report were mixed. Housing costs, which are the largest component of the index, managed an uptick of 0.2 percent in the period. All of the energy components declined, led by a steep drop of 2.8 percent in gasoline prices. Food prices held steady the iteration after rising in the previous five. Apparel costs fell for a fourth consecutive month. New vehicle prices dropped for a fifth time in a row, and used autos have been lower in each of the past six months.

This indicator is beginning to suggest prices are moving against the Federal Reserve’s desired outcome for inflation. Our central bank has a congressional mandate to keep prices steady, choosing to define “steady” as a two percent trajectory for inflation’s trend. Unfortunately for our monetary policy makers, the year-over-year headline tally is at the lowest reading since September 2016, and the core inflation rate hasn’t been lower since January 2015. Janet Yellen, Chair of the Federal Open Market Committee, has explained away this recent weakness as transitory, suggesting recent declines in prices for wireless phone services are having an abnormal impact on the tally. This may be the case, but if Yellen is incorrect and prices continue decelerating at the same time as interest rates are rising, the economy may be forced to ask, “Can you hear me now?”