Inflation fell sharply in June, making it the most encouraging news since the Federal Reserve began trying to contain rapid inflation 16 months ago. It also increased the chances that the central bank could stop raising rates after this month’s meeting.
The consumer price index rose 3% in the year to June, lower than the 4% rise in the year to May and only one-third of its peak of about 9% last summer.
The overall index is gas Prices can prove to be temporary, so policymakers are closely monitoring changes in prices in a leaner version — after removing food and fuel costs. The measure, known as the core index, provided even better news than economists expected.
The core index rose 4.8% year-on-year, down from 5.3% in the year to May. Economists had expected a 5% increase. And on a monthly basis, it rose at its slowest pace since August 2021.
Slowing inflation is definitely good news. This is because it can further increase consumer wages at gas stations and grocery stores. And if inflation can cool sustainably without a large rise in unemployment or a painful recession, workers will be ready to move forward with the big gains they’ve made over the past three years: more jobs and better wages. progress could be sustained. income disparity.
The White House, which has spent more than a year on the defensive stance against rising prices, welcomed the new report, with President Biden calling the current economic moment “Bidenomics in motion.” And stocks surged as investors bet that the Fed would be less aggressive in its fight against inflation, given the new data, and could even halt rate hikes after a final decision in July.
“This is very encouraging news,” said Laura Rosner-Warburton, senior economist and founding partner at Macropolicy Perspectives. “The pieces of the puzzle are starting to come together. But this is just one report, and the Fed has been hit hard by inflation before.”
Fed officials are still likely to avoid declaring victory. Policy makers are still trying to assess whether the cooldown is likely to be completed quickly and completely. They don’t want price increases to last too long at slightly higher levels. Consumers and businesses may then adjust their behavior so that faster inflation becomes a permanent feature of the economy.
That’s why officials have hinted in recent weeks that a rate hike is likely at the July 25th and 26th meetings. Policymakers also suggested that one or more more rate hikes could be justified after that.
“Inflation is too high,” Richmond Fed President Thomas Birkin said Wednesday at a speech in Maryland. According to Bloomberg. “Exiting too soon will cause inflation to rebound and require more action from the Fed.”
But economists and investors say the Fed is unlikely to raise rates again this year, given the latest data.
Policy makers have already slowed the pace of interest rate movements significantly and have postponed an adjustment at the June meeting. Assuming another postponement to September, it may be November before we have to seriously discuss raising borrowing costs again, by which time successes in curbing inflation may become apparent.
“They don’t want to unleash the animal souls here too quickly and turn everyone into bananas,” said Julia Pollack, chief economist at ZipRecruiter. But by November, “the data may reveal that their job is done.”
Details in the June report provided reasons for optimism. The slowdown in inflation came after some major goods and services recorded sharp price drops. Airfares fell 8.1% month-on-month, while used cars and trucks fell 0.5%. New car prices remained flat compared to May.
Not all of these changes will necessarily last. For example, airline tickets are not expected to continue to decline as sharply as this report suggests. But for the Fed, there were other encouraging signs that the cooldown was far enough to prove sustainable.
First, house prices, as measured by the consumer price index, which depends on rent prices, have fallen sharply. This situation is expected to continue for the next few months. An index that tracks rents for prime housing slowed to a 0.46% change in June. weakest increase After March 2022.
Car prices are also falling. Discounts are making a comeback in car-dealer lots after years of limited supply due to semiconductor shortages and other component problems that made it difficult to meet strong demand. Inventories are rebounding, and consumers are losing their appetite, especially for new cars.
“It’s not the last few years and it’s not the fall,” said Beth Weaver, who owns a Buick GMC auto dealership in Erie, Pennsylvania. “Interest rates are certainly putting pressure on demand,” he said.
And more broadly, price gains in the services basket, excluding energy, food and housing, indicators the Fed monitors very closely, continued to slow in June. This progress comes even at a time when unemployment remains near half-century lows and employment remains stronger than before the pandemic.
The Fed’s fight against inflation and a strong labor market go hand in hand, as the Fed’s rate hikes have the effect of limiting inflation in part by slowing the labor market and holding back wage growth.
“The economy has betrayed expectations that inflation would not come down without significant job destruction,” said Rael Brainerd, chairman of the National Economic Council, in a speech on Wednesday. “This economy is doing a great job for America’s middle class.”
Republicans tried to emphasize that inflation is still higher than usual. This fact has taken a toll on consumer confidence, as consumers feel reassured by cheap fuel and can replace their aging cars without facing eye-popping prices. , tags that might make this problem less noticeable.
Rep. Jason Smith, a Missouri Republican who chairs the House Ways and Means Committee, referred to core inflation in an emailed statement, stating that “inflation nearly double the Federal Reserve’s target is not the same as the U.S. wallet.” It’s not a win for the budget,” he said.
Inflation is still above its normal pre-2020 pre-pandemic rate and is still well above the Fed’s 2% target. The Fed uses another inflation measure, the Personal Consumption Expenditure Index, to define its target.This gauge has also slowed down noticeably, and the reading in June was Scheduled for release July 28th.
Even if central bankers take the slowdown cautiously (recognizing that inflation had previously slowed and then picked up again), many commentators see the new data as He hails it as the latest sign that the economy may be able to slow down gradually.
Fed officials are trying to engineer a “soft landing” in which inflation slows gradually without the need for a big rise in unemployment. Fed Chairman Jerome H. Powell has repeatedly said there was a “narrow road” to achieving this. Few historical examples have the Fed tackled significant inflation without triggering a recession.
Challenges continue to loom. With the economy strong and the job market strong, companies may have the leeway to keep raising prices. The ongoing war in Ukraine is always raging and can push up commodity prices.
But there are also factors that can help with that. Chinese backlash This means that there are fewer buyers vying for goods in the global market. Consumers are buying less retail goods and spending on services is slowing, if not plummeting.
And these trends, combined with more convincingly moderating inflation, may increase the likelihood of a gradual cooling.
“Powell’s statement is ‘a narrow path to a soft landing,'” said Michael Feroli, chief U.S. economist at JPMorgan. “It might look a little wider now.”
Alan Rappeport, Joe Rennison, and Lydia DePiris contributed to the report.