WASHINGTON: U.S. consumer prices rose modestly in June and recorded their smallest annual increase in over two years. This decrease in inflation is unlikely to deter the Federal Reserve from resuming interest rate hikes later this month. According to the Labor Department, the Consumer Price Index (CPI) increased by 0.2% last month, following a 0.1% rise in May. The rise in gasoline prices and rents offset the decrease in the price of used motor vehicles.
In the 12 months leading up to June, the CPI rose by 3.0%, the lowest year-on-year increase since March 2021. This follows a 4.0% rise in May. Economists surveyed by Reuters had predicted a 0.3% rise in the CPI last month, with a year-on-year increase of 3.1%.
Despite a sharp retreat from its peak of 9.1% in June 2022, inflation in the U.S. remains significantly above the Federal Reserve’s target of 2%. This is primarily due to the tight labor market. Although employment gains in June were the smallest in 2-1/2 years, the unemployment rate reached historically low levels and wage growth remained strong. Financial markets currently anticipate a 25 basis points interest rate hike at the Federal Reserve’s policy meeting, scheduled for July 25-26, based on CME’s FedWatch tool.
In June, the Federal Reserve refrained from raising rates. However, since March 2022, the central bank has increased its policy rate by 500 basis points, marking its fastest monetary policy tightening campaign in more than four decades.
The inflationary environment is showing signs of improvement, with a slowdown in the pace of underlying price increases. Excluding the volatile food and energy categories, the core CPI rose by 0.2% in June, the first time in six months that it did not post monthly gains of at least 0.4%. Over the 12 months through June, the core CPI increased by 4.8%, compared to a 5.3% rise in May.
Looking ahead, core inflation is expected to continue receding. Independent measures indicate a cooling labor market and a downward trend in rents. However, it’s worth noting that changes in rent tend to align with independent gauges only after several months.
In June, the Institute for Supply Management reported a drop in the prices paid by services businesses for inputs, reaching the lowest level since March 2020. This measure is seen as a reliable predictor of Personal Consumption Expenditures (PCE) inflation. Fed officials are closely monitoring the correlation between this price gauge and the core PCE services, excluding housing, known as the “super core,” to assess progress in the battle against inflation. – Reuters
Credit: The Star : Business Feed
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