Inflation data released Wednesday showed a sharp cooling and offered some of the most hopeful news since the Federal Reserve began trying to rein in rapid price rises 16 months ago.
The Consumer Price Index rose 3 percent in the year to June, less than the 4 percent increase in the year to May and only a third of its peak of about 9 percent last summer.
That general metric detects large drops in gas prices and some other products that could prove short-lived, which is why politicians are closely watching a different measure: the change in prices after removing food and fuel costs. That measure, known as the core index, delivered news that was even better than economists had expected, sending stocks higher as investors bet the news would allow the Fed to raise interest rates less than it intended. they would have done otherwise.
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, the core index rose at the slowest pace since August 2021.
“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.”
Slower inflation is certainly good news, because it allows consumers’ paychecks to stretch further and inflicts less pain at the gas station and in the grocery aisle. But Federal Reserve officials are still trying to assess whether the cooldown 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 in ways that make faster inflation a permanent feature of the economy.
Given that, they can be cautious when interpreting the news. Officials have signaled in recent weeks that they are likely to raise interest rates at their July 25-26 meeting.
Ms Rosner-Warburton said she thought a move in July was still likely, but new inflation data could set the stage for “a longer pause” afterwards. She added that a cooling in car prices and slower rent increases should keep inflation moderating on track, and she predicted that the Fed would not raise interest rates again this year after the July change.
The slowdown in inflation in June came 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.
But despite all the recent gains, inflation remains above the normal rate of increase before the 2020 pandemic. And the economy still maintains momentum, with strong job and wage growth, which could give companies the means to continue raising prices. That’s why Fed officials are hesitant to say they’ve won the battle against inflation.
“It would be a mistake” to “declare victory” too soon, Loretta Mester, president of the Federal Reserve Bank of Cleveland, said on a call with reporters this week.
The Fed has an official inflation target of 2 percent on average over time, though it 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 likely to interpret the slowdown with caution, mindful that price increases have slowed and then accelerated again, many commentators welcomed the new data as the latest sign that the economy may 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. Interest rate increases work 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 sustained decline in inflation is encouraging news for the US labor market outlook,” wrote Julia Pollak, chief economist at ZipRecruiter, in response to the new post. “It increases the likelihood that the Fed may pause rate hikes after a final hike in July and gradually lower rates through 2024.”