3 reasons inflation looks likely to slow in June after a temporary Spring surge
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- Several signals suggest the stronger inflation seen through spring will cool off in June.
- The Fed has long said faster price growth will be temporary, but recent readings show inflation booming in May.
- Three items suggest stronger inflation faded in June, including used cars and key metals.
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The months-long debate over US inflation risk could come to an end in just a few weeks.
As the US economy reopened and spending boomed through the spring, economists set their sights on popular gauges of inflation. The Biden administration and the Federal Reserve eased fears around a surge in price growth, saying the pick-up would likely fade as bottlenecks get addressed and Americans settle into a new normal. Other experts and GOP lawmakers raised concerns that accelerating inflation would persist, kicking off a new economic crisis.
Recent data amplified spring inflation fears. The Consumer Price Index rose 0.6% in May, beating the median estimate for a 0.4% jump. The measure also posted a 5% year-over-year gain, marking the strongest rate of broad inflation since 2008.
Yet some key items that powered the stronger-than-expected inflation print are cooling off in June, and look to be cooling off for the reasons cited by the White House and the Fed. The trends lend credence to claims that stronger inflation will be temporary and give way to a period of healthier price growth.
Here are the three cooling price points that suggest broad inflation is slowing in June.
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Used vehicles saw May’s largest month-over-month inflation, with prices leaping 7.3% in the latest CPI report. The jump accounted for one-third of the price index’s monthly gain and followed an even greater 10% surge in April.
The sector has seen extraordinary demand in recent months. Auto manufacturers have been forced to cut production due to a global semiconductor shortage. The bottleneck has since spilled over into the used-car market, where consumers can more readily buy vehicles.
Early indicators, however, suggest the sector saw far more moderate price growth through the start of June. The Manheim Used Vehicle Value Index rose just 0.3% in the first half of the month, auction company Manheim said. That compares to a 4.8% jump in May and an 8.3% surge in April.
The reading suggests used vehicle values likely peaked in mid-June, Manheim said. Considering the category counted for much of the broad inflation pick-up, any easing could drag significantly on the next CPI print.
2. Lumber
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After used vehicles, home prices are some of the fastest-accelerating in the US. Much of the surge is linked to lumber prices, which sat roughly five times higher year-to-date in May. The National Association of Home Builders estimated last month that, as lumber sat at its peak, the elevated cost was adding roughly $36,000 to the price of each new home.
But just as lumber rallied through April and May, it’s since erased most of its rapid gains. Prices now sit just above $900 per 1,000 board-feet, well below the May peak of about $1,645. While prices remain about 7% higher year-to-date, the steady decline suggests lumber costs won’t contribute to broad inflation gauges in June.
3. Industrial metals
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Other commodities have followed in lumber’s footsteps and come off their May highs. Prices of industrial metals such as copper, tin, and aluminum soared through the spring as supply shortages led factories to pay up for key materials.
Industrial metals and other commodities can serve as the base for broadly stronger inflation. A higher price of aluminum, for example, can bleed into selling prices for computers, appliances, and food packaging as businesses pass the rising costs on to consumers.
To be sure, the aforementioned metals haven’t fallen as sharply as lumber in the last few weeks. Still, their downtrends could establish June as the month the pandemic-era inflation scare ended.