By David Enna, Tipswatch.com
The just-released June inflation report is going to be greeted with glee, I think. It was exactly what the stock and bond markets were hoping for.
What happened? The Consumer Price Index for All Urban Consumers rose 0.2% in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all-items index increased 3.0%, the lowest annual rate since March 2021.
Core inflation, which removes food and energy, increased 0.2% for the month (the smallest monthly increase since August 2021) and was up 4.8% year over year.
All of these results came in lower than economist expectations. And it is remarkable to note that annual U.S. inflation has fallen from its high of 9.1% exactly a year ago, to this current rate of 3.0%, getting close to historical norms.
Of course, core inflation remains too high at 4.8% and has been barely inching lower over the last six months. Here is the 12-month trend in all-items and core inflation:
Now that all-items inflation has hit the 3.0% mark (surprisingly quickly), I think continued cuts in inflation are going to be difficult. Part of the reason for the rapid decline in annual inflation has been extremely high year-ago monthly increases (0.91% in February 2022, 1.34% in March, 1.10% in May and 1.37% in June). As we head into the last half of 2023, year-over-year comparisons will be with much lower numbers:
For the first half of 2023 — January to June — U.S. inflation increased 1.95%, which equates to an annual rate of nearly 4%. If we continue on that pace for the rest of this year, the annual inflation rate will start climbing higher. So many factors can effect future inflation: gasoline prices, wage increase, shipping costs, crop failures, etc. It’s too early for the Fed or the markets to declare inflation defeated.
The June inflation report
Gasoline prices rose 1% in June, partially offsetting the 5.6% decrease in May. Gas prices are down 26.5% over the last year, having a huge effect in bringing overall inflation lower.
But the BLS noted that the index for shelter (up 0.4% for the month) was the largest contributor to the monthly all-items increase, accounting for more than 70% of the increase. Other items from the report:
- The cost of food at home was unchanged, but up 5.7% year-over-year.
- The index for meats, poultry, fish, and eggs decreased 0.4% in June.
- Costs of used cars and trucks fell 0.5% for the month and is now down 5.2% year-over-year.
- Costs of new vehicles were unchanged.
- Costs of medical care services were also unchanged.
- The index for motor vehicle insurance was up 1.7% and is now up 16.9% year over year.
What this means for TIPS and I Bonds
Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances for TIPS and set future interest rates for I Bonds. For June, the BLS set the CPI-U index at 305.109, an increase of 0.32% over the May number.
For TIPS. The June inflation report means that principal balances for all TIPS will increase 0.32% in August, after a 0.25% increase in July. Here are the new August Inflation Indexes for all TIPS.
For I Bonds. The June report is the third of a six-month string that will determine the I Bond’s new inflation-adjusted variable rate. So far, inflation from the end of March to June has increased 1.08%, which if nothing else happens would translate to a new annualized variable rate of 2.16%. But three months remain, so it is far too early to make predictions.
I’d guess we are probably heading toward a new variable rate of around 3.4% to 3.7% (the new fixed rate, however, could be 0.9% or higher, setting up a composite rate of 4.5%+ for six months).
Inflation in the summer months is highly volatile, and non-seasonally adjusted inflation tends to run lower in the second half of the year, after running higher in the first half. Here are the numbers so far:
What this means for the Social Security COLA
The June inflation report sets a baseline for next year’s cost-of-living adjustment for Social Security beneficiaries. The COLA will be determined by comparing the average inflation indexes for July to September with the same number for those months in 2022. View historical data.
For June, the BLS set the CPI-W index at 299.394, an increase of 2.3% over the last 12 months. Last year’s three-month average for July to September was 291.901. So just based on June data, we’d be looking at a COLA increase of about 2.6%, but a lot can happen over the next three months.
I have updated my Social Security COLA page with projections based on differing inflation rates for July to September. Right now, I’d say the COLA looks likely to be in the range of 3.0% to 3.2%. I hope to write about this later in July.
What this means for future interest rates
My belief is that the Federal Reserve will raise short-term interest rates at least once more, and probably twice more in 2023. After that, it could go on a long-term pause, holding rates at these high levels until inflation is clearly defeated.
But, who knows? This morning’s Bloomberg headline says: “US Inflation Hits Two-Year Low, Giving Hope for End to Fed Hikes.” That’s accurate. There is hope. From the article:
Treasury yields plummeted, stock futures rose and the dollar slid following the report. The chances of an additional Fed rate increase after this month slipped to well below 50%.
The report underscores the progress of reducing price pressures since inflation peaked a year ago, aided by more than a year of interest-rate hikes and easing demand. Even so, price pressures are running well above the Fed’s target and will keep policymakers inclined to resume raising interest rates at their July 25-26 meeting.
At this point, the Fed would lose credibility if it fails to raise its federal funds rate 25 basis points in two weeks. That increase has been strongly signaled. After that, the future is uncertain (which is always the case, yes?)
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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
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Mr. Enna, greetings! I have been reading your posts for more than an year, and you helped and inspired me to learn more about TIPS. I am now retired and was looking to reduce risk in my portfolio and put away enough to guarantee an inflation-adjusted income stream to supplement my pension and social security. With the help of this site and Bogleheads, I have now completed a TIPS ladder to last through age 90. Feel much easier now, and it allows me to to take some more risk in the other part of my portfolio.
Thank you!
Appreciate that, thanks
David,
Do you believe that if inflation continues this falling trend that the EE Bond rate will be reduced in November? EE Bonds are looking attractive, but not if the rate is reduced.
At this point, I don’t think the EE Bond’s fixed rate would be reduced from the current 2.5%. Just before the May 1 reset, the 10-year nominal Treasury was yielding 3.44%. Now it is yielding 3.76.%. But things can change before November.
Great blog! Just curious why I’m not able to post comments. I submitted
a comment to the Medicare Advantage entry, but it never appeared. Tried
again using a different email address but
that comment did not appear either. It was a post about the special
Medicare Advantage plan called a Medicare Medical Savings Account, MSA.
Cheers, Pat
You may be OK now that your first comment has approved.
It will be interesting to see how the inflation narrative is presented over the next 6 months:
It seems to me that over the previous 6 months there’s been a focus on the year-over-year number coming down and how that is great news and the inflation problem has been mostly tackled. But that isn’t reality – inflation (though data is noisy month-to-month) seems to have stabilized at about 3.5%. Mar, May and Jun came in lowish; Jan, Feb and Apr came in highish but it isn’t obvious that there’s a clear downward trend and the rate over those 6 months is ~3.5%.
As David points out, the reason the y-o-y number has been coming down has been the roll off of the very high spring 2022 numbers. These were known and expected but somehow mostly ignored by the media as they focused on the y-o-y decline. But that tailwind is over and it’s near certain that the y-o-y numbers are going to start climbing again, at least until Jan 2024.
I wonder if the narrative will NOWchange as we see the headline number start to tick up again and they’ll start pointing out that the y-o-y increases are due to very low 2022 comparisons (which will be true).
Ursa, these are great points. In 2022, the scenario was the complete opposite: High inflation fears after the June 2022 report, and then inflation suddenly softened. This year, lots of optimism on inflation. Gas prices and service-sector wages will probably be the key.
I think this confirms the decision I made to sell my 0%-0.2% fixed rate I Bonds from over five years ago and go for short dated Treasuries and to pay off my HELOC. Sure, there is the tax hit, but my tax rate will not drop anytime soon and I will buy I Bonds at hopefully a higher rate in 2024 and 2025 than the ones I sold, as well as maybe TIPS if I feel I need more inflation protected funds.
David: Correct me is I am wrong but if inflation in 3 months is 1.08% then, all things being equal, the annualized inflation for the six month period should be 1.o108^4 -1 ~ 4.4%
“…inflation from the end of March to June has increased 1.08%, which would translate to a new annualized variable rate of 2.16%. “
I wasn’t projecting anything in that sentence. I was simply noting that we’ve had 1.08% inflation so far and that equals a variable rate of 2.16%. In other words, if we have zero inflation for 3 months, you get 2.16%. Last year, for example, the inflation rate was 3.03% for the first three months. Then the next three months inflation fell drastically and the variable rate ended up at just 3.38%.
.. but I don’t understand why the words “translate” and “annualized” are in the sentence. There must be something I am not getting.
Maybe this will help?
“If there is no further inflation over the next 3 months, then the March to June increase of 1.08% would translate to a new annualized variable rate of 2.16%.”
It said annualized because the variable rate is an annualized rate. I usually say something like “but three months remain” and I will add that to the article.
That is what I understood. In other words if there is deflation in the next 3 month the annual rate might be below 2.18% annualized and if there is inflation it will be over 2.18% annualized, but it is early to know.
Correct
This is either the last or next to last easy comparison MoM
Agreeing with you:
Cleveland Inflation Nowcast is projecting (as of today) the July CPI to be up 0.34 and the Core CPI to be up 0.40 for the month, and YOY CPI to be 3.35% and YOY Core to be 4.92% – all these numbers higher than were reported today
https://www.clevelandfed.org/indicators-and-data/inflation-nowcasting
Then again, the Inflation Nowcast numbers have been too high for several months now (including today’s numbers)
The forecast by Cleveland Fed includes July which is something that will be published in August. The inflation numbers by BLS (0.2%) are for June.
Investors worry about missing the turn, rates go down slowly.
Core CPI and Core PCE are finally getting on the same page after two years of deviation. Core CPI at 4.8% and Core PCE at 4.6% are flattening out, but they are still too high for the Fed. I agree we will see one more in July, but then it will depend on readings over the Summer (and Fedtalk at Jackson Hole) to confirm whether we will have more work to do. Also keep in mind the FOMC will have another dot plot in September. If inflation picks up again, count on rates higher this fall. If inflation does move significantly to the 2% target for headline PCE, July may be the terminal hike. We will all be singing “See You in September” this summer!