Inflation drops for the first time in years – this is why you shouldn’t celebrate just yet

The latest inflation report seemed like a gift.

For the first time in years, consumer prices actually fell. Bureau of Labor Statistics reported Its consumer price index fell 0.4% in June – the biggest one-month decline since April 2020. This reduced the annual rate from 4.2% to 3.5% in May.

Cue celebration, right?

not so fast.

I’ve been writing about money for over 35 years. In that time, I’ve seen a lot of inflation fears flare up and fizzle out.

And I’ve learned to be skeptical of a number that sounds great – because the story underneath is usually messier than the headline.

This is one of those times. This is why you shouldn’t pop the cork just yet.

1. Almost the entire decline was due to cheap gas

Flip the title and you’ll find the same culprit doing almost all the work: energy.

According to the BLS, the energy index fell 5.7% in June, its sharpest monthly decline since April 2020. Gasoline alone declined 9.7%. Get the energy out, and June’s “big” drop will mostly disappear.

Cheap gas is real money in your pocket, and I’ll never complain about that. But it is also the most volatile, least reliable part of the entire index. It swings hard, and it swings both ways.

Not a trend for a good gas month. It’s a coin toss that went your way.

And if you’re tempted to call the two reports a trend, take a closer look. June’s producer price index – which tracks how much businesses pay before the costs are passed on to you – told the same story.

It declined 0.3% in June, its weakest reading in more than a year. The reason? According to the BLS, wholesale gasoline prices fell 12%. Energy was drained, and producer prices barely budged there.

Same culprit. The same mirage. Just one step up in the supply chain.

2. Core inflation – the number that matters – remained unchanged

That part of the cable news has been omitted here.

Core inflation takes away food and energy, the two categories that jump the most. Economists keep track of this because it shows where prices are really going.

And in June, core prices did not fall at all. They were flat, leaving the annual core rate at 2.6% – still above the Federal Reserve’s 2% target, and stable for several months.

Translation: The underlying pressure pressing your budget hasn’t gone anywhere. A cheap filling only hid it for a month.

One thing before we go any further – the financial world has become noisier and duller than ever. Heat takes over everywhere. Almost none of these are worth your time. I’ve spent over 35 years avoiding noise so you don’t have to. Sign up for the FREE Money Talks newsletter – 10 seconds, no spam, just what matters.

3. What caused the decline is already reversing

Remember why gas became cheaper in June? Oil prices fell. Remember what causes oil prices to fall? Peace in the Middle East.

Guess what isn’t cool.

Tensions between the US and Iran have increased again and oil has started rising again.

By this week, Brent crude had hit a one-month high above $86 a barrel and the national average for gas was back at $3.86, according to AAA. None of this is visible in the June report – the CPI is lagging by a month.

So the only force pushing prices down is already pushing them back up. I’ve written about how a waterway on the other side of the planet can lead straight to your gas tank, and that lesson hasn’t changed.

4. Even the Fed isn’t buying it

If these reports were crystal clear, the Fed would be planning a rate cut. It’s not like that.

Even after two soft readings in two days, traders are still betting that the Fed will keep rates on hold at its July meeting — CME’s FedWatch tool puts those odds at near 90%. No deduction. A catch.

And look no further: This fall, those same futures markets actually lean toward a rate hike, not a cut. The people whose entire job it is to read inflation are not pulling any corks.

Oxford Economics even said that May could prove to be this year’s peak – but only if the Middle East remains calm. See point 3 for how this is going.

5. So what should you really do?

Nothing dramatic. This is the whole matter.

A mild report is no reason to change your plans – just as a scary report was no reason to panic. The people who get hurt are the ones who keep chasing headlines.

So keep doing boring, powerful things. Eliminate high-interest debt first – credit card rates are still north of 20%, and the Fed’s stance on accomplice means they’re not falling.

And keep your cash somewhere that actually pays you. The best savings accounts and CDs are still paying around 4%, while the national average is a pitiful fraction of that.

Hint: Sophie Offers a combined checking and savings account with no account fees, and with eligible direct deposit you can earn up to 3.80% APY on savings – which is several times the national average. (APY is variable and may change at any time.) New members who establish a qualifying direct deposit may also be eligible for a cash bonus of up to $400 depending on the deposit amount. Terms apply – see details.

Enjoy cheap gas while it’s available. Just don’t build your budget around it.

Because the main thing here is this: inflation was not brought under control in June. It took a month off, courtesy of the gas pump. And those holidays may already be over.