Inflation cooled significantly in June, offering some of the most hopeful news since the Federal Reserve began trying to rein in rapid price rises 16 months ago, and raising the chances that the central bank may stop raising interest rates. interest after your meeting this month.
The consumer price index rose 3 percent in the year to June, according to data released Wednesday, less than a 4 percent increase in the year to May and only a third of its peak of about 9 percent last summer. past.
That blanket measure is being toppled by big drops in gas prices that could prove ephemeral, which is why politicians are closely watching a smaller version: the change in prices after removing food and fuel costs. That metric, known as the core index, delivered news that was even better than economists expected.
The core index rose 4.8 percent from a year earlier, down from 5.3 percent in the year through May. Economists had forecast a 5 percent rise. And on a monthly basis, it rose at the slowest pace since August 2021.
Slower inflation is certainly good news, because it allows consumers’ paychecks to stretch longer at the gas station and in the grocery aisle. And if inflation can sustainably cool without a big rise in unemployment or a painful economic downturn, it could allow workers to hang on to the biggest gains they’ve made over the past three years: progress toward better jobs and wages that has helped undermine income inequality.
The White House, which has spent more than a year on the defensive over rising prices, hailed the new report, and President Biden called the current economic moment “Bidenomy in Action.” And stocks soared as investors bet the Fed could be less aggressive in its fight against inflation, even halting interest rate hikes after a late July move, in light of the new data.
“This is very promising news,” said Laura Rosner-Warburton, a senior economist and founding partner of MacroPolicy Perspectives. “The pieces of the puzzle are starting to fit together. But it’s just one report, and the Fed has been burned by inflation before.”
Fed officials are likely to avoid declaring victory for now. Policymakers are still trying to assess whether the cooling is likely to be rapid and complete. They don’t want to let price increases stay at slightly elevated levels for long, because if they do, consumers and businesses could adjust their behavior so that faster inflation is a permanent feature of the economy.
That’s why officials have signaled in recent weeks that they are likely to raise interest rates at their July 25-26 meeting. Policymakers also indicated that one or more additional rate moves might be warranted after that.
“Inflation is too high,” Thomas Barkin, president of the Federal Reserve Bank of Richmond, said in a speech in Maryland on Wednesday. according to Bloomberg. “If you pull back too soon, inflation comes back strong, requiring the Fed to do even more.”
But economists and investors saw less chance that the Fed would raise rates again later this year in light of the new data.
Policymakers have already slashed the pace of rate moves, skipping an adjustment at the June meeting. Assuming they wait again in September, that could mean it would be November before they have to seriously discuss rising borrowing costs again, and by then, success in bringing down inflation could be clear.
“They don’t want to unleash animal spirits here too quickly and make everyone go crazy,” said Julia Pollak, chief economist at ZipRecruiter. But by November, “it can be clear from the data that your job is done.”
The details of the June report offered grounds for optimism. Inflation slowed as some key products and services saw sharp price declines. Airfares fell 8.1 percent from the previous month, and used cars and trucks fell 0.5 percent. New vehicle prices were flat compared to May.
Not all of those changes will necessarily last: airline tickets, for example, are not expected to continue to decline as sharply as they did in this report. But for the Fed, there were other encouraging signs that the cooling is broad enough to prove sustainable.
For one, the cost of housing as measured by the Consumer Price Index, which is based on rental prices, is falling dramatically. That is expected to continue in the coming months. An index that tracks the rental of primary residences slowed to a change of 0.46 percent in June, the weaker rise since March 2022.
Car prices are also cooling. After years in which semiconductor shortages and other parts woes limited supply, making it difficult to meet rising demand, discounts are making a comeback on car dealer lots. Inventories are picking up and consumers have a less voracious appetite for new cars in particular.
“It’s different from the last two years, and even different from the fall,” said Beth Weaver, who runs a Buick GMC car dealership in Erie, Pennsylvania. “Interest rates have certainly weighed on demand.”
And more broadly, price increases for a basket of services that exclude energy, food and housing costs, a metric the Fed watches closely, continued to slow in June. That progress comes even as unemployment hovers at its lowest level in half a century and hiring remains stronger than before the pandemic.
The Fed’s interest rate hikes work to curb inflation in part by slowing the job market and cooling wage increases, so the Fed’s fight against inflation and labor market strength are closely linked.
“The economy is defying predictions that inflation would not fall without significant job destruction,” Lael Brainard, director of the National Economic Council, said during a speech on Wednesday. “This economy is working well for the American middle class.”
Republicans tried to highlight that inflation remains higher than usual, a fact that has been weighing on consumer confidence, though it may become less important as consumers take relief from cheaper fuel and find they can replace your old cars without having to face amazing prices. labels
“Inflation that is nearly twice the Federal Reserve’s target is not a victory for America’s wallets and budgets,” said Rep. Jason Smith, a Missouri Republican and chairman of the House Ways and Means Committee, in a statement sent by email, referring to the core inflation rate. .
Inflation remains above the rate of increase that was normal before the 2020 pandemic, and is still much faster than the Federal Reserve’s 2 percent target. The Fed defines that target using a separate inflation measure, the personal consumption expenditures index. That indicator is also slowing markedly, and its June reading is scheduled for release the 28th of July.
Even if central bankers are taking the slowdown with a grain of salt, mindful that price rises have slowed and then sped up again sooner, many commentators welcomed the new data as the latest sign that the economy could slow. gently.
Fed officials have been trying to engineer a “soft landing,” in which inflation slows gradually and without requiring a big jump in the unemployment rate. Jerome H. Powell, the Fed chairman, has repeatedly said that there was a “narrow path” to achieving this: there are few if any historical examples of the Fed fighting significantly lower inflation without a recession.
The challenges keep coming up. The economy has momentum and the job market is strong, which could give companies the means to continue raising prices. The war in the Ukraine could always escalate, driving up the prices of raw materials.
But there are also factors that could help: china rebound it has been weaker than expected, which means there are fewer buyers competing for goods in global markets. Consumers are buying fewer retail goods, and while spending on services isn’t plummeting, it has been gradually slowing.
And as those trends combine with declining inflation more convincingly, the odds for a mild cooling may be improving.
“Powell’s saying is ‘it’s a narrow road to a soft landing,’” said Michael Feroli, chief US economist at JP Morgan. “It looks maybe a little wider now.”
alan rapport, joe renison and Lydia DePillis contributed reporting.