Prices for shelter and transportation services moderated in June and even modestly fell for vehicles. “None of this is a surprise,” Sathe said. “Used-car auction prices were falling in previous months, and those are a leading indicator for the vehicle component of CPI. A weakening housing market that started last year is being more fully manifested in today’s numbers. And demand for summer travel is moderating.
“This may give hope for further falling prices, but education expenses and expected increases in medical insurance—driven by rising insurers’ margins last year—are due in the coming months, so core inflation overall may not recede as quickly. And, frankly, inflation can’t be reined in until we see the labor market slow down further, given the close and complex relationship between wages and inflation.”
After raising interest rates by 25 basis points on July 26, the Fed will also be looking closely at the labor market to help determine whether further rate hikes may be needed to bring core inflation back toward its 2% target. (A basis point is one-hundredth of a percentage point.)
The recent sharp drop in headline inflation does not radically change Vanguard’s outlook for the economy, Sathe said: “Inflation may continue to moderate, but it remains a concern. The Fed cutting rates is unlikely any time in the near future, and a mild recession is still likely.
“That said, the latest inflation figures do provide hopeful signs for the economy, but no one should believe the inflation fight is over.”