Inflation eased substantially in June, providing some of the most promising news since the Federal Reserve began trying to control rapid price increases 16 months ago — and boosting the prospect that the central bank will meet this month. May be able to stop the rise in interest rates after.
According to data released on Wednesday, the consumer price index climbed 3 percent for the full year to June, down from a 4 percent increase for the full year to May and only a third of its peak of nearly 9 percent last summer.
that overall measure is being pulled down due to the large decline gas Prices that may prove short-lived are why policymakers keep a close eye on a more subdued version: the change in prices after removing food and fuel costs. That metric, known as the core index, produced news that was even better than economists were expecting.
The core index climbed 4.8 percent over the previous year, down from 5.3 percent in the year to May. Economists had estimated a 5 percent increase. And on a monthly basis, it climbed at the slowest pace since August 2021.
Slower inflation is undeniably good news, as it allows consumer pay to stretch further to the gas pump and grocery aisle. And if inflation can come down steadily without a big increase in unemployment or a painful economic downturn, it could allow workers to hold on to the major gains they’ve made over the past three years: progress toward better jobs and wages that have made them less on income inequality.
The White House, which has spent more than a year on the defensive over rising prices, celebrated the latest report, which President Biden called the current economic moment “Bidennomics in action.” And stocks jumped as investors bet the Fed would be less aggressive in its fight against inflation — even pausing its interest rate hikes after last July’s move — in light of the new data.
“This is very promising news,” said Laura Rosner-Warburton, senior economist and founding partner of Macropolicy Perspectives. “The pieces of the puzzle are starting to come together. But this is just one report, and the Fed has been scorched by inflation before.”
Fed officials are likely to refrain from declaring victory for now. Policymakers are still trying to assess whether the cool-down is likely to be quick and complete. They do not want to allow price increases to persist at slightly higher levels for too long, because if they do, consumers and businesses may adjust their behavior in ways that will make more rapid inflation a permanent feature of the economy. .
That’s why officials have indicated in recent weeks that they may raise interest rates at their meeting on July 25 and 26. Policymakers also indicated that one or more additional rate changes may be needed thereafter.
“Inflation is very, very high,” Thomas Barkin, president of the Federal Reserve Bank of Richmond, said in a speech in Maryland on Wednesday. according to bloomberg, “If you back off too quickly, inflation kicks in again, requiring the Fed to do even more.”
But economists and investors see little chance the Fed will raise rates again later this year in light of the latest data.
Policymakers have already sharply slowed the pace of rate hikes, barring an adjustment at the June meeting. Assuming they delay again in September, it could mean they will have to seriously debate raising borrowing costs again in November – and by then, success in reducing inflation may be evident. .
“They don’t want to expose animal souls too quickly here and go bananas with everybody,” said Julia Pollack, chief economist at ZipRecruiter. But by November, “it may be clear in the data that their work is done.”
The details of the June report offered reasons for optimism. Inflation moderated with a sharp decline in the prices of some core products and services. Air fares declined 8.1 percent from the previous month, and used cars and trucks declined 0.5 percent. New vehicle prices remained stable compared to May.
Not all of these changes are likely to last: for example, airline ticket prices are not expected to continue to decline as rapidly as this report suggests. But for the Fed, there were other encouraging signs that the cool-down has been broad enough to prove sustainable.
For one thing, the cost of housing as measured by the Consumer Price Index – which depends on rent prices – is falling rapidly. This is expected to continue in the coming months as well. The index tracking rents for primary residences changed 0.46 percent in June. weakest growth From March 2022.
Car prices are also cooling off. After years when semiconductor shortages and other parts problems limited supply, making it difficult to meet rising demand, discounts are making a comeback on car dealer lots. Inventories are rising again, and consumers are particularly less enthusiastic about new cars.
“It’s different from years past, and also different from the fall,” said Beth Weaver, who runs a Buick GMC car dealership in Erie, PA. “Interest rates certainly have an impact on demand.”
More broadly, price increases for a range of services excluding energy, food and housing costs – a metric the Fed monitors very closely – slowed in June. This progress comes even as unemployment is nearing its lowest level in half a century and hiring remains stronger than it was before the pandemic.
The Fed’s interest rate increases work to slow inflation partly by slowing the job market and cooling wage growth, so the Fed’s fight against inflation and labor market strength are closely linked.
“The economy is defying forecasts that inflation will not come down without significant job destruction,” Lael Brainard, director of the National Economic Council, said during a speech on Wednesday. “This economy is delivering strong results for America’s middle class.”
Republicans tried to highlight that inflation is still higher than normal – a fact that is hurting consumer confidence, although it may become less prominent as consumers feel relieved by cheap fuel and realize This means that they can exchange their old cars without facing a staggering cost. tag.
“Inflation nearly twice the Federal Reserve’s target is not a win for the American wallet and budget,” Rep. Jason Smith, a Missouri Republican and chairman of the House Ways and Means Committee, said in an emailed statement, referring to the core inflation rate. ,
Inflation still remains above the rate of growth that was typical before the 2020 pandemic, and is still well above the Fed’s 2 percent target. The Fed defines that target using a different inflation measure, the personal consumption expenditure index. That gauge is also slowing down significantly, and so is its June reading. scheduled for release On 28 July.
Even though central bankers are taking the slowdown cautiously – knowing that price growth has slowed and then accelerated earlier – many commentators have welcomed the latest data point as the latest sign that the economy is slowing. It may slow down.
Fed officials are trying to plan for a “soft landing” in which inflation slows gradually and does not require a big jump in the unemployment rate. The Fed chairman, Jerome H. Powell, repeatedly stated that there was a “narrow path” to achieve this: there are few historical examples of the Fed reducing significant inflation without causing a recession.
Challenges keep looming. The economy is booming and the job market is strong, which may give companies the wherewithal to raise prices. The war in Ukraine could escalate at any time, causing commodity prices to rise.
But there are also factors that can help: China’s counterattack has been weaker than expected, meaning fewer buyers are competing for goods in global markets. Consumers are buying less retail goods, and spending on services isn’t falling, but it’s slowing down.
And as these trends combine with inflation, which is easing more markedly, prospects for a gradual cooling may improve.
“Powell says ‘it’s a narrow road to a soft landing,'” said Michael Feroli, chief US economist at JP Morgan. “It’s probably looking a little wide now.”
allan rappeport, Joe Rennison And Lydia Depillis Contributed reporting.