U.S. consumer inflation is no longer a food and energy problem but a core problem.

That's according to new data released Wednesday morning by the U.S. Bureau of Labor Statistics (BLS). It showed that headline inflation, as measured by Consumer Price Index (CPI), rose at an annual rate of 3% in June of 2023, below the 4% May reading and the lowest since March of 2021.

Much of the drop is the result of a 16.7% annual decline in energy costs in June (vs -11.7% in May). Fuel costs dropped by 36.6% for oil, 26.5% for gasoline, and 18.6% for utility gas service. There's also been a slowdown in food prices (5.7% vs 6.7% in May).

The picture is less bright for "core inflation," which takes food and energy out of the consumer budget. Core CPI rose at an annual rate of 4.8% in June 2023, down from 5.3% in the prior month and below market expectations of 5%.

Still, the lower headline inflation was a relief to market observers confused by conflicting labor market reports released last week.

"What a difference a week can make, " Steve Wyett, Chief Investment Strategist at BOK Financial, told International Business Times. "After a hotter than expected ADP employment report, where the idea of a 6% terminal rate was bandied about, the DOL employment report was a bit softer, and now we get a CPI report which indicates the inflation cooling trend continues."

CIO George Mateyo of the Cleveland-based Key Private Bank also welcomed the June CPI report.

"There has been significant progress made on the inflation front, and today's report confirmed that while most of the country is dealing with hotter temperatures outside, inflation is finally cooling," he told IBT. "Inflation fell in most of the essential categories, most notably housing prices, which had been elevated, and other closely watched components such as food and services."

Anthony Denier, CEO of Webull, notes that the June numbers drop considerably from the 9% recorded last June, a 40-year high, and the 4% increase this year through May.

"This number reflects a big decline in energy prices," he told IBT. "Even core CPI, which strips out food and energy, was up 4.8% vs. expectations of 5%, and that's the lowest level since October 2021. It's excellent news for consumers and investors."

Mateyo believes the Federal Reserve will read this report as validation that its policies are working. Inflation has fallen while growth has not yet stalled. Still, he thinks that it most likely won't change their mind to raise interest rates later this month.

"While the Fed may now feel more comfortable undertaking an extended pause, we doubt a pivot will take place soon, barring further weakness in the U.S. labor market and wages," he added.

Wyett is on the same page. He doesn't think the softer headline June inflation report will stop the Fed from acting at their meeting later this month. "But it does help reduce fears of a Fed who might have to get more aggressive with rates than currently expected," he said.

Denier agrees. "Fed officials are likely to be cautious with these numbers and will probably raise rates at the next meeting," he said. "Yet, I think the market's rally is anticipating there won't' be a second-rate hike."

(Corrected on July 24, 2023: An earlier version of this article incorrectly identified Key Private Bank as based in Australia. The error is regretted.)

Inflation