Inflation hits 3%. The easy part is over

When headline US consumer price inflation dropped to 3.0 per cent in June, financial commentators rushed to declare the war on inflation won. The headline retreat from nine per cent to three per cent was indeed rapid, but it was largely an arithmetic illusion powered by base effects. The explosive energy and food price spikes of mid-2022 rolled out of the twelve-month calculation, mechanically flattering the annual metric.

The Last Mile Challenge

With core inflation remaining stubbornly elevated at 4.8 per cent, the easy part of the disinflation journey is decisively over. Base effects turn neutral and subsequently adverse in the second half of the year. Compressing core inflation from five per cent to two per cent requires breaking momentum in domestic rents, medical services, and wage-heavy recreation—components that exhibit profound downward price rigidity.

A celebratory three per cent headline print relies on flattering statistical base effects that are about to expire, leaving the Federal Reserve to battle an entrenched core that will not surrender easily.