June inflation numbers came in slightly below expected, with the headline CPI up 0.2 percent on the month and 3.0 percent year-over-year, compared with Econoday's consensus forecasts of 0.3 percent and 3.1 percent, respectively. The core CPI, excluding food and energy, was also up 0.2 percent from May and increased 4.8 percent year-over-year versus expectations of 0.3 percent and 5.0 percent.

Although the monthly headline index marked an acceleration from 0.1 percent in May, the 12-month rate came down from 4.0 percent, reaching its lowest level since March 2021 and confirming the slowing momentum since the June 2022 peak at 9.1 percent. Core inflation was even more encouraging as the monthly rate was the lowest since August 2021 and the 12-month rate since October 2021.

Food prices were up 0.1 percent on the month and 5.7 percent on the year, both slowing down from May. Energy recovered 0.6 percent on the month after falling 3.6 percent but was down 16.7 percent year-over-year after decreasing 11.7 percent in May.

Shelter was once again the largest contributor to the monthly all-item CPI increase, of which it explained more than 70 percent despite a slowdown from May: the shelter index rose 0.4 percent on the month after 0.6 percent the previous month. Motor vehicles insurance also boosted the monthly CPI with a 1.7 percent advance, along with gains in apparel, recreation and personal care. On the downside, prices for airline fares, communication, housing furnishings and operations all decreased on the month.

Shelter was also the largest contributor to the month-to-month and 12-month core CPI gains. The 7.8 percent year-over-year shelter price increase accounted for two-thirds of the core CPI advance.

Despite the acceleration of total monthly inflation in June, the FOMC will likely appreciate the slowing momentum in the core monthly and year-over-year indexes and the 12-month all-items index.

With today's data, Econoday's Consensus Divergence Index is very near the zero line, at minus 3 which points to an economy performing in line with expectations, consistent with a stable policy stance.

Core prices in June are expected to slow to a comparatively modest 0.3 percent on the month versus May's 0.4 percent. Overall prices are also expected to rise 0.3 percent. Annual rates are expected to slow sharply at the headline level, to 3.1 from 4.0 percent, and also for the core, to 5.0 from 5.3 percent.

The CPI is a measure of the change in the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation for the consumer. Annual inflation is also closely watched.

The consumer price index is available nationally by expenditure category and by commodity and service group for all urban consumers (CPI-U) and wage earners (CPI-W). All urban consumers are a more inclusive group. The CPI-U is the more widely quoted of the two, although cost-of-living contracts for unions and Social Security benefits are usually tied to the CPI-W, because it has a longer history. Monthly variations between the two are slight.

The CPI is also available by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for many metropolitan areas. The regional and city CPIs are often used in local contracts.

The Bureau of Labor Statistics also produces a chain-weighted index called the Chained CPI. This measures a variable basket of goods and services whereas the regular CPI-U and CPI-W measure a fixed basket of goods and services. The Chained CPI is similar to the personal consumption expenditure price index that is closely monitored by the Federal Reserve Board.

The consumer price index is the most widely followed monthly indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets- and your investments.

If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation as you know the $100 will not be able to buy the same amount of goods and services a year from now. The CPI tells us that prices rose 4.2 percent in the U.S. over 2007. To recoup your purchasing power, you would have to charge 4.2 percent interest. You might want to add one or two percentage points to cover default and other risks, but inflation remains the key factor behind the interest rate you charge.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.