Finally, Prices Actually Fall

The Bureau of Labor Statistics just released the Consumer Price Index for June. For the first time since the pandemic in 2020, prices inched lower by 0.1%. That reduced the 12-month inflation rate to 3%. This is good news for consumers, but we may not be out of the woods just yet.

Energy prices, in general, fell in June. Gasoline prices fell 3.8% after falling 3.6% in May. Excluding energy and food prices, the CPI increased 0.1% in June, which is also very encouraging. Many people are hoping this latest data will encourage the Federal Reserve to start to reduce the high interest rates.

The next Fed Open Market Committee (FOMC) meeting is at the end of this month. While the inflation numbers look promising and many economists are encouraging the Fed to reduce interest rates this month, the Fed will probably hold the rate constant.

The FOMC meets again in mid-September. By then the Fed will have the CPI number for July and August. If the pattern of monthly increases continues to remain near zero, the Fed will cut rates then. But energy prices are rising in July. Depending on a number of factors, energy prices could increase further in August.

If that happens, the Fed will not cut interest rates in September but will consider rate cuts at the November meeting.

At the same time, the economic growth is slowing. The economy grew at a 1.4% annual rate in the first quarter of this year. The first estimate of second quarter growth will be available at the end of this month. Most economists are forecasting growth to be in the 1.5% to 2% range.

The labor market is also cooling as the number of new jobs created monthly is falling near the 200,000 level. Unemployment has inched up to 4.1%. While 4% has historically been considered full employment, today that may not be the case since unemployment remained below 4% for the last two years.

The Fed must be very cautious. It realized they made two very serious errors in the past. The first was from January 2021 to June 2022, with inflation increasing every month, it kept interest rates near zero. That was a large part of the reason inflation rose to 9.1%.

The Fed reacted to that error by raising interest rates aggressively from June 2022 to September 2023 taking the Federal Funds Rate from near zero to over 5.25%.

The second error was in September 2023 when it stopped raising interest rates. That allowed inflation to linger and even increase in 2024. Had they raised rates one or two more times, which would have taken the Federal FundsRrate to at least 6%, the inflation that we are experiencing in 2024 would not have happened.

Americans welcome the slight decline in overall prices seen last month. But prices are up nearly 20% since January 2021. Average household income has increased by about 15% during that time period. That means consumers do not have sufficient income today to purchase what they did in 2020. That has led to a decline in the standards of living, which is why, despite the positive economic news, consumers do not approve of the economic policy of the last three years,

One economic solution that would bring down overall prices is to increase energy production. For oil, that can easily be accomplished by salvaging the Keystone pipeline, allowing drilling on federal lands, and making the permitting process less difficult. In addition, action could be taken to increase the supply of natural gas.

That would reduce all energy prices. Gasoline prices would fall back to $2.50 per gallon. Since energy accounts for about 30% of the CPI, overall prices would decline. While deflation is not advocated, a short period of declining prices would be welcomed.

Then if government spending deficits were reduced, we would be on the road toward price stability. That’s one of the goals of economic policy.

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