The inflation of June might be a lot more than the inflation of today. And the future.

You may have heard that there was a bright red flashing inflation alert this week! Let's start with the Consumer Price Index, and not surprisingly, energy was a big driver behind the increase.

The energy index increased 7.5 percent in June after rising 3.9 percent in May. The gasoline index rose 11.2 percent in June after increasing 4.1 percent in May. (Before seasonal adjustment, gasoline prices rose 9.9 percent in June.) The index for natural gas rose 8.2 percent in June, the largest monthly increase since October 2005. The electricity index also increased in June, rising 1.7 percent.

The energy index rose 41.6 percent over the past 12 months. The gasoline index increased 59.9 percent over the span, the largest 12-month increase in that index since March 1980. The index for electricity rose 13.7 percent, the largest 12-month increase since the period ending April 2006. The index for natural gas increased 38.4 percent over the last 12 months, the largest such increase since the period ending October 2005.

But much of the energy increases are lagging information, as anyone who has been driving anywhere in the last couple of weeks can tell you that gas prices are falling.

That's what I paid last Saturday, and the same stations are $4.09 or even lower today.

However, the reality of smaller increases won't do much to slow down the “9% inflation” talking point, because July, August and September 2021 had a slowdown in CPI growth compared to other months, so the year-over-year figure won’t decline much at all.

In another key sector the continued jump in food prices made a strong contribution to the increase in CPI for June.

The food index increased 1.0 percent in June following a 1.2 percent increase the prior month. The index for food at home also rose 1.0 percent in June, the sixth consecutive increase of at least 1.0 percent in that index. Five of the six major grocery store food group indexes rose in June. The index for other food at home rose 1.8 percent, with sharp increases in the indexes for butter and for sugar and sweets. The index for cereals and bakery products increased 2.1 percent in June, with the index for flour rising 5.3 percent. The dairy and related products index rose 1.7 percent over the month, following a 2.9- percent increase in May…..

The food at home index rose 12.2 percent over the last 12 months, the largest 12-month increase since the period ending April 1979. All six major grocery store food group indexes increased over the span, with five of the six rising more than 10 percent. The index for other food at home increased the most, rising 14.4 percent, with the index for butter and margarine increasing 26.3 percent. The remaining groups saw increases ranging from 8.1 percent (fruits and vegetables) to 13.8 percent (cereals and bakery products).

If there's some solace on the CPI side, the core index wasn’t as bad (+0.7%), and the year-over-year increase is under 6% for the first time in 2022.

The second shot of inflation news happened this morning, and it caused stock markets to tank at the open of trading (it later recovered most of those losses and thwe NASDAQ even eked out a tiny gain). The Producer Price Index also showed a sizable topline increase for June, but I took a look at the details of the report, and noticed that last month’s increase mostly came from one side of the economy.

The Producer Price Index for final demand increased 1.1 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This rise followed advances of 0.9 percent in May and 0.4 percent in April. (See table A.) On an unadjusted basis, final demand prices moved up 11.3 percent for the 12 months ended in June, the largest increase since a record 11.6-percent jump in March 2022.

In June, three-fourths of the advance in the index for final demand was due to a 2.4-percent rise in prices for final demand goods. The index for final demand services increased 0.4 percent.

That’s an interesting divide there between goods and services. And almost all of that increase in PPI for goods in June came from one area.

… Nearly 90 percent of the June increase can be traced to a 10.0-percent jump in prices for final demand energy. The indexes for final demand goods less foods and energy and for final demand foods advanced 0.5 percent and 0.1 percent, respectively.

Product detail: Over half of the June increase in the index for final demand goods is attributable to gasoline prices, which jumped 18.5 percent. The indexes for diesel fuel, electric power, residential natural gas, motor vehicles and equipment, and processed young chickens also moved higher. In contrast, prices for chicken eggs dropped 30.2 percent. The indexes for iron and steel scrap and for jet fuel also decreased.

The 0.1% increase in foods is a very good sign that the large consumer inflation in that area may be subsiding in the future, although it comes on the heels of big increases between 2.1% and 3.1% in every month between January and April, so it may still take a bit to work through, as stores and producers will still try to make up for lost margins at the start of the year.

However, a look at futures prices for several types of food products indicates that not only will prices stop skyrocketing, but they may well drop. Let’s start with milk prices, which have had a sizable runup in the first half of 2022, but the futures markets are indicating that this rise will tumble back down in the coming months and then some.

Among other food futures, corn was down by more 6% on Thursday\, should fall by quite a bit more in the next 2 months, and stay at that lower level through the rest of the year. And wheat prices should stabilize, even with the uncertainties over what (if anything) might be available from Ukraine.

A positive side of the CPI report were declines in both beef (-2.3%) and pork (-1.6%) prices after both products had big increases beforehand. And pork futures are indicating that prices will fall even further for the rest of 2022.

So while the inflation reports showed that prices kept going higher in June, we’ve also seen indications that a reversal of that is happening in July. And there seems to be a good possibility that the price hikes from earlier this year will also be reversed in some key sectors. If that’s the case, and if consumers are already adjusting to higher prices by substituting products or simply consuming less of them, then there is danger of moves being made to react to numbers that may not reflect reality anymore.

That’s why I hope the Federal Reserve doesn’t raise interest rates by a full point next week, which is something an increasing number of Wall Streeters are discussing. That would be a significant shock to home markets and people who borrowed with flexible interest rates, and would be piling onto a situation where consumers and markets already seem to be adjusting, and levelling out inflation.

A 100-point Fed increase would also sends a message that the economy is unstable, when I don’t think that’s true. Jobs continue to be added at a brisk pace, and wage growth is continuing at a decent nominal number (albeit not enough to catch up to inflation…for now). I also expect to see decent levels of consumer spending continue, especially in service-related industries that haven’t been seeing the price hikes that goods have in recent months.

I don’t want to see the Federal Reserve force a harmful recession when one might not be required to get inflation back to a level that doesn’t put strain on everyday Americans’ pocketbooks or businesses’ spending decisions. As I’ve said before, 4% unemployment and 5% inflation is a whole lot better than 6% unemployment and 2% inflation, and I would hope you would agree with that.

Something missing re: inflation vs. unemployment tradeoff debate is who bears the brunt of contractionary policy.

There are those who will never feel the effects of a recession and that clouds their analysis. pic.twitter.com/QUtPML8Tmi

— Gbenga Ajilore (@gbenga_ajilore) July 13, 2022