Inflation and Interest Rates Plummet! It Won't Last; Takeaways

Consumer Price Index (CPI) numbers were released today, and interest rates plummeted in response.

“Headline CPI” fell to only 0.18% month-over-month (comparing June to May), and to only 3.0% year-over-year (comparing June of 2023 to June of 2022).

“Core CPI” (which excludes food and energy prices because they are considered too volatile) fell to only 0.16% month-over-month and to 4.8% year-over-year.

If that Core month-over-month reading holds, we’d be at the Fed’s desired and magic “2.0% annual inflation goal.”

In any case, interest rates fell sharply today in response to the news, as inflation news is probably the single biggest influence on interest rates.

A few takeaways:

It Won’t Last.
1. The Fed: Today’s rate drop will probably not last in the near term at least. This is because the Fed keeps moving the goal posts or changing the economic report they seem to be focusing on, whether it is Headline CPI, Core CPI, PCE (another inflation reading), or the labor markets.
1. Next month’s reports may not be so favorable. This is because last June’s reading was high while last July’s reading was lower, making it less likely that the July year-over-year numbers will look as good when they are released in August. Also, used car, insurance, and shelter costs continue to be relatively high. The Saudis continue to cut oil production too in an effort to keep oil prices higher.
No Straight Lines Up or Down: Rates never move in a straight line, and neither does inflation. So, we are going to see both continue to bounce around. This is extremely important to remember so we don’t get alarmed when we see rates jump.
Jeff Snider and Barry Habib Were Right: Both Snider and Habib have been predicting falling inflation for months now. Their timing has been off, but they are nonetheless still vindicated to some extent because their analyses were largely correct. This is important once again because they are both predicting much lower rates in the future, and the accuracy of their analyses thus far gives us reason to believe them.
Holding on to My Longer-Term Prediction. No matter what happens over the next few months, I remain convinced that we are barreling headlong into a bad recession and far lower rates next year – for reasons I have set out about a zillion times, including: falling M2 money supply, plummeting bank lending, very weak manufacturing sector, falling PPI numbers, lag effect of rate increases, recessions overseas and especially in China, banking crises on the horizon, commercial real estate crises on the horizon, cracks in the labor market, etc. Mr. Snider lists all of the reasons for concern in his podcast pretty much every day.