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Inflation Slows to Its Lowest Pace in More Than Two Years, Providing Relief for Consumers
Sharp Slowdown in Inflation in June
In June, inflation slowed sharply to its slowest pace in more than two years, bringing relief to consumers. Various categories, including energy, groceries, and housing, experienced price relief, resulting in less pressure on consumers' wallets. The consumer price index (CPI) increased by 3% in June compared to the previous year, a decrease from May's 4% increase. This reading is the smallest 12-month increase since March 2021 and a significant pullback from June 2022's 9.1% increase.
Reasons for the Slowdown
Economists attribute the easing price pressures to the fading effects of supply shocks caused by the Covid pandemic and the Russian war in Ukraine. While household expenses haven't fallen, they aren't rising as quickly as before. This slowdown in inflation is particularly good news for consumers because average workers' earnings growth now outpaces inflation, resulting in an increase in their standard of living after two years of declines.
Although inflation remains above the Federal Reserve's long-term target of around 2%, economists believe that inflation is moving in the right direction. Mark Hamrick, senior economic analyst at Bankrate, states that while the journey towards the 2% target is progressing, it is not yet over. The inflation slowdown has been broad-based, affecting various categories such as food, energy, vehicle prices, and housing. Gasoline prices, in particular, have fallen dramatically, decreasing by almost 27% in the past year.
Measuring Inflation and Future Outlook
While grocery price inflation has also decreased significantly from its peak in the summer of 2022, economists rely on a measure called "core CPI" to assess inflation's trajectory going forward. This measurement excludes categories such as food and energy, which can be highly volatile. The core CPI reached a 20-month low of 4.8%, which is potentially even more encouraging than it looks. Furthermore, economists predict that housing prices will continue to fall throughout the second half of the year. At the current pace of inflation, the core CPI metric should return to the target level within a year.
Inflation Rates for Different Categories
Motor vehicle insurance, recreation, household furnishings and operations, and new vehicles have experienced notable increases in annual inflation rates. However, several categories, including airline fares and communication expenses, saw deflation from May to June. Inflation during the pandemic era has been a complex phenomenon caused by multiple sources and dynamic interactions. The imbalance between supply and demand has been a major factor contributing to inflation, along with the war in Ukraine and inflation in services. As the economy reopened after the pandemic, businesses rushed to hire workers, resulting in strong wage growth and higher labor costs, which led to businesses raising prices. The Federal Reserve is expected to raise interest rates at least once more to combat inflation and bring it back to its target level.
Conclusion: Implications for New Businesses
The recent slowdown in inflation holds several implications for new businesses. While the easing price pressures provide relief to consumers, they also present opportunities and challenges for entrepreneurs. Here is a "hot take" on how this topic may impact new businesses:
1. Cost of Operations: With inflation slowing down, new businesses may find greater stability in the cost of operations. Prices for energy, groceries, and housing have experienced relief, potentially reducing expenses for businesses in these sectors. This creates an environment where entrepreneurs can plan and budget more effectively, allowing for better decision-making and potentially higher profit margins.
2. Consumer Sentiment: As average workers' earnings growth outpaces inflation, consumer confidence and purchasing power may increase. This can benefit new businesses by generating more demand for their products or services. Entrepreneurs who tap into the current atmosphere of consumer relief and optimism may have a greater chance of success.
3. Competitive Landscape: The the slowdown in inflation can also impact the competitive landscape. While some industries have seen notable increases in annual inflation rates, others, such as airline fares and communication expenses, experienced deflation. Entrepreneurs considering entry into highly inflationary categories may need to navigate higher costs and potential price increases, making it crucial to carefully assess market conditions and competitive pressures.
4. Future Outlook: The positive outlook on inflation, with economists predicting a potential return to target levels within a year, creates a favorable environment for new businesses. As inflation continues to trend downward, entrepreneurs can leverage this period of stability to establish their ventures, build customer loyalty, and solidify their market positions.
In summary, the slowdown in inflation provides a mixed bag of opportunities and challenges for new businesses. By capitalizing on the relief experienced by consumers, controlling costs, understanding industry-specific inflation rates, and leveraging the positive outlook, entrepreneurs can position themselves for success in this evolving economic landscape.
Article First Published at: https://www.cnbc.com/2023/07/12/heres-the-inflation-breakdown-for-june-in-one-chart.html