Has the Great Biden Inflationary Wave crashed after two years of wage destruction? Or has the tide merely gone out for a cycle?

The Bureau of Labor Statistics reported this morning that the Consumer Price Index hit its lowest year-on-year level since the worst levels of inflation in 40 years began in March 2021. The 3% year-on-year rate still exceeds the Federal Reserve target level, but it’s a big improvement — at least for now:

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent in June on a seasonally adjusted basis, after increasing 0.1 percent in May, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.0 percent before seasonal adjustment.

The index for shelter was the largest contributor to the monthly all items increase, accounting for over 70 percent of the increase, with the index for motor vehicle insurance also contributing. The food index increased 0.1 percent in June after increasing 0.2 percent the previous month. The index for food at home was unchanged over the month while the index for food away from home rose 0.4 percent in June. The energy index rose 0.6 percent in June as the major energy component indexes were mixed.

The fall in inflation came mainly from a slowdown in price increases in food and energy. This can be seen in the much-less-dramatic decline in the core CPI rate, which is significantly higher at 4.8% (year-on-year):

All of this is good news, especially on energy costs. Year on year, the energy index has fallen by 16.7%, and the price of gasoline has fallen 26.5%. Electricity, on the other hand, has risen 5%, but it’s not significant enough a change to counter the other falling energy costs. However, if food and energy begin rising again — and they have been pretty volatile in the Bidenflation wave — we’ll suddenly see that blue line shoot back up. The fundamental over-inflation problem still appears to persist in core CPI, even at a somewhat reduced rate.

Even better, wages have finally started to grow faster than inflation, for the first time in over two years — most of Joe Biden’s presidency. For now, that is:

Wages did top inflation in May, but only barely (+0.2%)
In June, wages exceeded inflation by +1.2% in the past year.

Full data below
(Positive numbers indicate wages exceeding inflation in the past 12 months) pic.twitter.com/aNYsPZyX76

— Heather Long (@byHeatherLong) July 12, 2023

Note that chart well, because it speaks to a lingering issue in how inflation works. These effects are cumulative — they build on each other each month. That is how inflation is calculated and how it impacts people in the economy. A drop in the inflation rate does not mean inflation is over; it just means that its rate has slowed. All of the price hikes still remain from two-plus years of inflation, and so does all of the wage destruction shown by Heather Long in this chart.

Bidenflation has dug a deep hole for workers. The bottom is dropping at a slower rate now, and workers appear to have gained a step up from it. The hole still remains, however, and workers have not climbed out of it. And they won’t for a very long while, especially at this rate of gain. Of the last 26 months of Bidenflation, this month’s wage shift ranks only 19th for moves in either direction. Furthermore, Bidenflation has been compounding on Bidenflation for a long time now, so smaller numbers at the moment does not mean return to normalcy — although they do indicate that the runaway quality of inflation has faded, at least for the moment.

Keep this cumulative effect in mind when the White House starts declaring victory over inflation and the media engages in supportive happy talk. The compounded damage has been done and still remains, and even a low number like 3% indicates 3% inflation from a Bidenflated frame of reference.

The Wall Street Journal points out the long-term effects in its report:

Ali Salim, 34 years old, said rising prices for rent and gasoline have squeezed his budget. His landlord raised the rent 24% last year on his one-bedroom apartment in a Seattle suburb, then another 10% this year, he said.

Salim said he decided to move to a new, smaller apartment, which has fewer amenities and is 8 miles further away from the office where he works as a solutions architect at a tech company.

“I’m going to have to drive further and spend a bit more on gas, which is another pain point,” he said. Washington state has the highest gasoline prices in the nation at an average of $4.96 a gallon of regular unleaded, according to OPIS, an energy-data and analytics provider, well above the national average of $3.54 a gallon.

Salim said increased expenses leave him saving about 40% of his salary, compared with about 60% before the rent increase last year.

Salim isn’t gaining any ground in this new report. He’s just not losing ground as fast as he was before.

Nor has the Fed been fooled. They tend to watch for PCE index inflation, and June’s report on that metric will come out closer to the end of the month. To the extent they do consider CPI, they watch core CPI, and this isn’t enough to avoid the next rate hike:

However, central bank policymakers tend to look more at core inflation, which is still running well above the Fed’s 2% annual target. Mateyo said the report is unlikely to stop the central bank from raising rates again later this month.

Fed officials expect the inflation rate to continue falling, particularly as costs ease for shelter, which makes up about one-third of the weighting in the CPI. However, the shelter index rose 0.4% last month and was up 7.8% on an annual basis. That monthly gain accounted for about 70% of the increase in headline CPI, the Bureau of Labor Statistics said.

“Housing costs, which account for a large share of the inflation picture, are not coming down meaningfully,” said Lisa Sturtevant, chief economist at Bright MLS. “Because rates had been pushed so low by the Fed during the pandemic and then increased so quickly, the Federal Reserve’s rate increases not only reduced housing demand — as intended — but also severely limited supply by locking homeowners into homes they would have otherwise listed for sale.”

Finally, let’s not forget that inflation numbers actually eased up last summer too, for a short period. The core CPI rate suggests that this may be a temporary artifact as well. When we get to October, we’ll know whether this was the end of Bidenflation, or merely another intermission.

Update: One VIP member objected in the comments to the use of the term “hyperinflation” to describe the past two years, and raised a fair point about how economists generally use that term. On the other hand, the last two years of inflation have been the worst sustained inflation this country has seen in 40 years too, so it’s not just plain ol’ ‘inflation’ either. I’ve changed “hyperinflation” to “Bidenflation” as a result.