Register CPI Report
June’s inflation report turned out better than initially anticipated.
The headline figures were impressive. The consumer price index dropped by 0.4% during the month, marking the largest decline since the significant drops in March and April of 2020, when the economy was suffering from pandemic-related shutdowns. To find a similar decrease, you’d have to look back to January 2015, when the CPI fell by 0.7%.
It’s no surprise that gasoline prices were a significant factor in this drop. The pandemic led to a sharp decrease in global oil demand, which in turn caused energy prices to plummet. Back in 2015, Brent crude oil prices had fallen to around $50 a barrel as OPEC attempted to counter U.S. shale production by increasing supply, even as global economic downturns contributed to weakened demand expectations. Japan’s economy was contracting, Europe’s economy was stagnant or shrinking, China’s real estate market was faltering, Brazil was declining, and other emerging markets were also facing challenges.
Looking back even further, notable monthly declines occurred from late summer to fall in past years. In 2008, the global financial crisis was fully underway. Before that, during September 2006, the consumer price index had declined by 0.5% due to the end of the summer driving season and a sharp drop in oil and gas prices, aided by a stabilization following the post-Katrina price spikes of the previous year. The reverse of the 2005 energy price increases post-Katrina also contributed to a 0.5% CPI decline.
To find similar declines, you have to go back to 1986. What caused that? After OPEC lost its grip on the global market, Saudi Arabia ceased defending its oil prices, leading to a price drop of nearly 50%. While this benefited the overall U.S. economy, it negatively impacted Texas and other domestic oil-producing areas, causing local economic contractions.
The broader context is that oil and gasoline have contributed to reducing headline inflation historically. However, the drops seen in 2020 and 2015 were driven by a lack of demand linked to economic downturns. In essence, they reflect a narrative of bad deflation rather than good. The declines in 2006, 2005, and 1986 mirror this current situation since they were not a result of recessions.
Falling prices are rarely good news (except now)
What distinguishes June’s report from positive past deflation cases is the scope of its content. In earlier favorable deflation scenarios, core prices typically continued to rise. Yet, last month, Core CPI remained unchanged.
Services, excluding those related to energy, were stable for the month, rising 3.2% over the past year. Notably, services without shelters dropped by 0.2%, the largest fall since January 2021. Core commodity prices also experienced a 0.1% decline. Therefore, while the headline negative figures were largely due to energy prices, it’s not solely energy that is exerting disinflationary pressures on the economy.
This situation seems to represent a unique case of overall deflation or disinflation within a growing economy characterized by low unemployment. This time, it truly feels different.
To echo the sentiments of some great 20th-century poets, you may not always receive the inflation you desire. But if you give it a chance now and then, you might discover that you get the inflation you actually need.
