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June inflation report: How high was inflation? What is the consumer price index?

The US Labor Department released the June Consumer Price Index (CPI) report on Wednesday which showed inflation cooling more than expected last month.

Update:
June CPI report showed inflation cooled more than expected
ERIC GAILLARDREUTERS

The Bureau of Labor Statistics (BLS) reported a headline 0.2 percent increase in the Consumer Price Index for June. Core inflation, minus volatile food and energy prices, was 0.2 percent last month, the smallest single month increase since August 2021.

Based on the data from June, the year-over-year inflation rate tracked by the CPI stands at three percent for all items, economists had expected a 3.1 percent increase. June’s reported headline CPI is down from the four percent recorded last month and significantly from the figures recorded last summer, when it peaked at 9.1 percent a year ago. The CPI has dropped for 12 straight months. Year-over-year core inflation stood at 4.8 percent, down from 5.3 percent last month and below the 5 percent forecast.

READ ALSO: Will the Fed raise interest rates again in July? This is what experts say

What goods and services drove the increase?

According to the BLS, the main driver of inflation in June, accounting for 70 percent of the increase, was shelter, which increased 0.4 percent, following a 0.6 percent rise in May. The year-over-year increase has dropped slightly from eight percent in May to 7.8 percent last month.

The BLS also noted that motor vehicle insurance drove average prices up slightly, with transportation service 8.2 percent higher than June last year. Other sectors that saw gains were apparel, personal care and recreation.

Decreases were seen in airline fares, communication, household furnishings, medical care services and used cars and trucks. The last sector saw a 0.5 percent decrease month-on-month and prices were 5.2 percent lower than this time last year.

What is the Consumer Price Index?

Inflation is a difficult thing to quantify and efforts to do so can never be entirely accurate. However, to estimate the rate of price change, the BLS utilizes the Consumer Price Index.

The BLS describes the CPI as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”

Each month the BLS collects updated prices for a ‘Basket of Goods’ comprised of around 94,000 items and services designed to reflect typical prices. The total cost of the basket is then compared to the same month one year earlier.

The percentage change over the course of the year is given as the annualized inflation rate for that month.

How is inflation linked to high interest rates?

Inflation has been a major issue for the US economy over the past year as the post-pandemic recovery continued. In a bid to tackle that trend, the Federal Reserve, like other central banks around the world, has implemented a series of interest rate hikes. Last month saw the first pause after policymakers raised rates 10 consecutive times for a total of 500 basis points. That is the fastest pace in forty years.

Upping interest rates makes borrowing more expensive and discourages new investment from the economy. The Fed is hoping that this will stem the flow of new money and slow rapid economic growth. It also wants to see the labor market loosen up. The rapid recovery from the pandemic-induced economic crisis saw far more jobs available than workers that could fill them.

With far more jobs available than workers, many in the job market could shop, comparing benefits and negotiating salary increases which has helped lead to wage growth. While studies have shown that increased pay is not making things more expensive, it concerns policymakers who see it as aiding consumers to keep spending in spite of higher prices which in turn is creating more demand than the market can supply.