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Inflation Guy’s CPI Summary (June 2026)
Okay, I will admit that I came into today thinking ‘this is one of the more low-stress releases in quite a while. We know headline inflation is going to be negative, and it’s just a question of whether core is 0.20% or 0.26%.’ The Bloomberg consensus was for -0.12% (seasonally adjusted) on headline CPI, and +0.23% on core CPI. That core CPI forecast would annualize to 2.8% or so, clearly indicating that inflation hadn’t fully returned to target but also not super alarming. The swap market was aligned with economists’ forecasts.
Wow, were we collectively wrong on that!
The conspiracy nuts are going to have a field day with this, even though the Federal Reserve has nothing to do with the Bureau of Labor Statistics. We get a new Fed Chairman and wham! Inflation suddenly has a sharp, surprising drop. I don’t think we need to get involved in that. There are some weird things with this number, and they all sort of got weird in the same direction, but I wouldn’t call them suspicious. However, the conspiracy nuts will point out – rightly – that there’s nothing other than gasoline that feels like its price is declining. And yet…the actual data for today showed a m/m decline in headline cpi of -0.42% and a decline in core of -0.02%.
That is a massive miss in core and the biggest decline – outside of March, April, and May 2020 – since March 2017. And in March 2017, the dip was caused by a 7% single month decline in Wireless Telephone Services, caused because the sudden shift to ‘unlimited data’ plans blew up the hedonic adjustment for data…going from 5gb to ‘infinity’ caused issues. (I wrote about that in How the BLS Methodology for Wireless Plans Exaggerated a Small Effect). Before that, January 2010 when post-housing-bubble home prices and rents were in retreat and almost turning the y/y core inflation negative (it got down to 0.6%). Before that, 1982. So, an outright decline in core CPI is rare, and especially with the overall trend firmly in the too-high-for-the-Fed zone, this is a large outlier.
The last-12-core numbers chart looks more like headline CPI than core CPI. That’s partly due to the Oct/Nov dips caused by the way the BLS handled the shutdown, and the April spike due to the payback on the rental survey. But let’s say that if you were selling straddles on core inflation, this is drastically more vol than you were pricing.
So, we go hunting for culprits. Breaking into the 8 major subcategories suggests some places to look.
A lot of the Transportation decline is of course gasoline, but the gasoline drag was pretty much spot-on what had been in the forecast. The forecasts had been looking for an 0.35% difference between headline and ex-food-and-energy CPI, and we actually had 0.40%.
One part of the explanation – as every part of a big miss on core must be – comes from rents. Primary Rents were +0.15% m/m, and OER was +0.24% m/m. Last month, those were +0.36% and +0.30%, which were not drastically far off from the current trend. But this month, the y/y decelerated again.
Airfares was +0.21% m/m; that’s a place I looked as a possible culprit since while it’s in ‘services’ these days it’s mostly a pass-through for energy and with energy dropping sharply I thought it was possible. It hasn’t happened yet, though. Lodging Away from Home was a surprising -2.32% m/m (surprising because the assumption is that the World Cup would keep it bid for another month), but LAfH moves around a lot and we can’t put it all at the feet of the hotels. Used Cars was -0.23% m/m, and New Cars -0.02% m/m, and that’s part of it too but hardly big enough to call it a major surprise.
So we continue to investigate but note that Median CPI is likely to be low also. My early estimate is +0.156% m/m, although I note that the median category is probably one of the regional OERs so I’ll be off by a little bit at least.
If that sort of Median CPI was repeated 11 more times, it would mean y/y Median CPI would be at 1.9%, well below the Fed’s target (since Median is typically above core by 0.25%-0.50%). Color me skeptical.
It’s worth noting that Core Goods inflation did not abruptly collapse. My thesis is that if the Fed’s going to get back to target, and I’m even vaguely right about housing, then you really need to see core goods to be around zero to have a good shot of getting there. And we aren’t really even sniffing it yet.
Or, alternatively, we would want to see SuperCore drop sharply. There’s no obvious sign of that, but it does bear noting that Core-Services-ex-Housing was -0.21% m/m.
That was the lowest supercore since 2020, and before that the Cell Phone Services thing in 2017.
Let’s look, since I’ve mentioned it twice now, at cell phone services.
Three things bear pointing out here. First, note the general deflation in cell phone services prices. Yeah, yeah, I know your contract hasn’t gone down in price much but you’re getting more and more quality. It’s a pretty steady trend. Second point: note that the upward divergence in 2023 almost exactly mirrors the downside divergence in 2026 before this month. The shapes are actually almost congruent. You get that frequently in a year/year rate when an item spikes in price, and then that spike falls out of the y/y. But this isn’t a year/year rate. This is an NSA price index. I can’t think of any reason for that weird phenomenon…it must be methodological somehow. Third point: this month’s spike is clearly an outlier. That doesn’t mean it isn’t real, but it does mean I don’t expect it to be repeated. For scale, note that the change is about 1.5 points on the index. The 2017 decline was 3.7 points. Odd, and I can’t explain it yet, but again: unlikely to be repeated. For what it’s worth, this is not an irrelevant weight: “Telephone Services” in the CPI carries a 1.5% weight. Thanks, “screenagers!”
I always survey the biggest-gainers and biggest-losers monthly change list, using the breakdown the Cleveland Fed uses for Median CPI. Because they are the tails, they don’t affect the median but they do affect core. This month, the biggest losers list included Lodging Away from Home (already mentioned), Jewelry and Watches (small weight), Communication (just mentioned), Infants’/Toddlers’ Apparel (small weight), and … Motor Vehicle Insurance, which declined at an annual rate of 22%. Odd?
Car insurance is 2.7% of CPI, so it is noticeable. Does this make sense? It’s possible, I suppose, because of the decline in used car prices…and, perhaps, there’s an effect from mass deportations here, since if you have fewer uninsured motorists then the cost of insurance should fall. I did not see it coming, and unlike the telephone thing I can imagine there could be some modest further declines ahead if I’m right about the causes.
So: housing, cell services, car insurance. Definitely some outliers. Rents will probably recover to get back to a more-normal run rate of +0.25%/month – after all, even with this surprise we’re right on our model.
Is it only outliers? The Enduring Investments Inflation Diffusion Index declined, so there was some narrowing of the inflation advance, but it didn’t exactly plunge. I’m going to say then that this was more the outliers than a fundamental shift of inflation momentum (at least, that’s what I think right now!)
From the Fed’s perspective…from Warsh’s perspective…this is obviously very welcome. There is little chance of any hike in US policy interest rates this year. There wasn’t much chance of it before this number either, since the new Chairman’s stated preference is for a smaller balance sheet and lower interest rates (both of which policies retard inflation, in different ways). But there is even less of a chance of a rate hike now. However, it does bear remembering that as we move later in the year, the core and median y/y numbers are going to rise, simply from base effects, and especially in October and November when the shutdown effects fall out. Ergo, it may be difficult to price out all hikes from the yield curve, unless the economy starts to visibly weaken.
Let me leave you with one last chart, to remind you that it is premature to declare victory over inflation.
M2 y/y growth is back to 5.6% y/y, and climbed at a 7% annualized rate over the last 6 months. The balance sheet has actually been growing, not shrinking, since December. Is that Powell’s last middle finger to Trump? In any event, that’s one reason that money growth is back in the range that was normal prior to COVID. But during that pre-COVID period, there were unique trends that held inflation lower than it otherwise would be: demographics and globalization being two of them. Those effects have reversed, and consequently (I’m sorry but I can’t say it often enough) a 6%ish growth in the money supply is no longer consistent with 2% inflation. Either the Fed needs to get religion (and Warsh has the hymnal open, but it’s not clear yet if anyone is going to sing along with him) and shrink the balance sheet to rein in money growth, or inflation is going to remain stubbornly resistant to a return to 2%. Phones and car insurance can’t do it all.
This Warsh Guy Might Be a Keeper
A few weeks into the Warsh Fed Chairmanship, and there are a couple of changes that I think are worth pointing out. Both are subtle, and I present them as a longtime Fed watcher and rates strategist and Inflation Guy.
The first one is something I missed at first, until I heard it again. Warsh has been talking in terms of the Federal Reserve having a 2% inflation target or goal. This may not seem like much, since central bankers routinely pledge allegiance to that goal. But over the Powell term as Chairman, that went from being something concrete to merely vacuously aspirational. First, in 2020, the Fed abandoned a 2% target and instead implemented “Flexible Average Inflation Targeting,” or FAIT. That policy said that if inflation ran below (above) the 2% target, the central bank would adjust policy to allow it to subsequently run above (below) the target for a time in order to get the average back to 2%. Now, this presumes a fine motor control over inflation that the Fed most certainly has never demonstrated, and it also conveniently left out parameters such as the averaging period. But at least it was a strategy (ambiguous, but a strategy) rather than merely a goal.
Then, in August 2025, Chairman Powell announced that the Fed was abandoning the ‘make-up’ part of the strategy. So, the Fed would still target 2%, but only as an average over time, and if inflation deviated from that average, they wouldn’t do anything about it. I wrote about it at the time in “The Fate of FAIT was Fated.” It really helped highlight the flaccidity of the Powell chairmanship.
Yet, Powell continued to talk in terms of a 2% target. In my mind, that’s just going back to an aspirational, hypothetical goal. We aren’t trying to get inflation to 2% now, mind you, just over time. Over some unspecified amount of time. And if we try to lower inflation and can’t get it down, we just re-select the averaging period, I guess. If we were at 5% for a while, so you lost a lot of real wealth, and then inflation returns to 2%…well, then a year or so later the Fed says ‘see? The average over the last year was 2%. Sorry about all that other money you were counting on. That’s never coming back.’
Anyway, so Warsh has been referring to a 2% target. It’s not clear to me in what context he means that. In the original sense of ‘we respond when it deviates from that level’? In the current sense of ‘it would be nice, but we aren’t going to take any specific actions over any specific period’? Or does he mean to reinstitute a commitment strategy so that 2% means something? I sure hope it’s the latter, and I have certainly seen some signs that Warsh is a bit sharper than the last few Fed Chairmen, but until he says so I suppose we don’t know for sure. He could do worse than to systematically dismantle everything that Powell did…
The other change is large and obvious, but there is a subtle effect that I think is being missed and should be pointed out. Under Chairman Warsh, the Fed has moved to eliminate forward guidance. The number of speeches from Fed officials is probably likely to decline as a result, since that’s the only reason anyone goes to listen to a Fed speaker.[1] I have said a huge number of times that I think more opacity from the Fed is super important in helping to squeeze excess financial risk from the system. Other folks have made the same observation, and clearly Warsh agrees with this – he frames it in terms of giving the Fed more flexibility to change course when data changes, but the only reason that opacity does that is because in the alternative case there is a disincentive to change very much lest people think the central bank – gasp! – is unable to forecast the economy very well and is being surprised a lot.
But here is what I think people have missed. It is my belief that this change is also part of the Fed’s inflation-fighting strategy. Here is the mapping of my reasoning. Less guidance obviously produces more policy uncertainty, and I just pointed out that means it is prudent to carry less financial leverage. Another way to say the same thing, but focusing on individuals rather than institutions, is that increasing policy uncertainty leads to more demand for precautionary cash balances. Institutions respond to greater uncertainty and volatility by reducing risk. Individuals respond to greater uncertainty by holding more cash, so that they can respond to the increased vicissitudes of life – job loss, for example.
And that’s important, because an increase in the demand for precautionary cash balances implies lower monetary velocity, and lower velocity means a lower price level for the same level of money and output. This is a big part of why inflation did not immediately explode when the Fed and Treasury dumped trillions of dollars of liquidity into the economy almost overnight – people were scared and held a lot of that cash for a while, rather than spending the money. As we know, velocity eventually rebounded as people spent those balances down, and inflation resulted.
As a matter of fact, Economic Policy Uncertainty is an input variable into Enduring Investments’ model for money velocity. It is not nearly as important a variable as the absolute level of interest rates, but we can reject the hypothesis of irrelevance at the 1% level and it improves the fit of the overall model so it is economically relevant as well.
Again, I don’t really know if this is part of Warsh’s master plan, or just a fortunate outcome. But luck is the residue of design. For now, I’m hopeful this is more design than luck – but I will take it, either way.
[1] It isn’t like they are at all entertaining, even to an economist. Why would you subject yourself to a Fed speech, if there is no useful forward-looking content?!
