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Consumer Price Index (CPI): Inflation continued to fall in June, focus on reduction in September

Consumer Price Index (CPI): Inflation continued to fall in June, focus on reduction in September

Inflation fell more than expected in June, giving Federal Reserve officials another dose of encouraging data as they move ever closer to cutting interest rates and providing long-awaited relief for households and businesses.

Data released Thursday by the Bureau of Labor Statistics showed that prices rose 3 percent year over year, an improvement from the 3.3 percent annual rate in May. Prices also fell 0.1 percent month over month.

In addition, a key inflation indicator that excludes more volatile categories such as food and energy rose 3.3 percent over the past 12 months – the smallest annual increase since April 2021.

Joe Brusuelas, chief economist at RSM, summed it up this way: “It’s better than good.”

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But housing costs remain a major driver of overall inflation and are difficult to contain because America lacks enough housing. Overall, housing costs rose 5.2 percent for the year, but have cooled compared to the previous month, suggesting that long-awaited progress is finally taking hold.

The White House touted the positive inflation news, particularly falling prices for expensive items such as cars, appliances, airline tickets and groceries. The White House also pointed to its own measures to curb inflation. But political turmoil overshadowed one of the best inflation reports of Biden’s presidency, showing again how difficult it was for Democrats to sell a strong economy to voters.

Policymakers have been waiting to cement their confidence that inflation is starting to ease, and barring any surprises, economists and Fed watchers quickly agreed on a cut at the central bank’s mid-September meeting.

Such timing would hamper the November presidential election, potentially benefiting Democrats who are touting a strong labor market and solid growth. And it could draw attention – particularly from likely Republican nominee Donald Trump – to an institution that tries to stay out of politics.

“A lot can happen between now and September 18, but unless most of the numbers return to ‘hot’ territory, the Fed’s rationale for not cutting rates may no longer be justified,” wrote Chris Larkin, managing director of trading at Morgan Stanley’s E-Trade, in an analyst note.

Regardless of the timing, a quarter-percentage-point cut won’t turn the economy around, and financial markets were subdued throughout the day. But it would be a sign that Fed officials are confident inflation will continue to settle toward more normal levels. And it would be a relief for households and businesses that continue to suffer the strain of high borrowing costs for homes, cars and other loans.

Speaking to reporters on Thursday, San Francisco Fed President Mary Daly said that adjusting interest rate policy in one meeting versus another “simply doesn’t make much of an impact.” However, she said that discussions among Fed policymakers about potential risks to the labor market if interest rates remain too high for too long were notable.

“We have been focused for so long on reducing inflation and restoring price stability. And now that the labor market is back in balance, you hear us talking about it,” Daly said. “It’s a fundamentally different discussion than the one we had before we began the rate hike campaign,” she added.

Jared Bernstein, chairman of the Council of Economic Advisers, told the Washington Post the report was welcome news for American consumers and inflation watchers alike. Bernstein said he had expected earlier in the year, when inflation trends were declining, that it would be more of a pause or a setback down the road.

“I certainly understand the nervousness (in the first quarter),” Bernstein said, “but we have indicated publicly that disinflation would pick up again, and it looks like that is happening.”

For months, real-time metrics from companies like Zillow and Apartment List have shown that rental costs have mostly eased or even fallen over the past year. Economists and Fed officials are now waiting for that change to be reflected in official government statistics. And they are frustrated by the delay, because it will be difficult to fully reduce inflation unless rents also come down.

The first signs of a slowdown finally appeared in June. It is assumed that the delays in calculating the housing market data are slowly but surely balancing out.

Other core areas of the American budget also saw relief. Gasoline prices fell significantly, falling 3.8 percent in June – more than enough to offset the rise in housing costs. Energy prices also fell two percent, remaining at the same level as the previous month.

Overall, food prices rose slightly. However, certain food categories provided relief to households. Fruit and vegetables, as well as cereals and baked goods, saw prices fall in May.

Inflation has come a long way since its 40-year peak in 2022. Supply chains have cleared their backlogs and wages have stopped rising as quickly since people – especially new immigrants – entered the workforce and filled acute labor shortages. Gas and energy costs have also fallen after soaring due to Russia’s invasion of Ukraine.

The Fed also raised interest rates aggressively to slow the economy. High borrowing costs typically curb demand by discouraging people from buying new homes or expanding their businesses. But the Fed has managed to raise rates without triggering a major economic slowdown or a recession. And while employers are hiring more slowly than last year, they are keeping their pace at a healthy level. The economy added 206,000 new jobs in June and the unemployment rate rose slightly to 4.1 percent.

In his testimony before the U.S. Congress this week, Fed Chairman Jerome H. Powell said recent labor market data “show that there is a significant slowdown in the labor market.” For example, the ratio of job openings to available workers has declined significantly since the pandemic.

The risk, however, is that the Fed keeps interest rates too high for too long – essentially prioritizing the fight against inflation over the labor market. This delicate balance has financial markets, economists and families across the country pushing for the Fed to cut interest rates.

“We are well aware that we now have two-sided risks,” Powell said. “We are committed to balancing them as best we can.”

At the Fed’s last meeting in June, officials planned just one rate cut this year. Just a few months ago, three rate cuts were planned. But economists don’t expect officials to be ready to cut rates by the time they meet in late July, so they’re turning their attention to the remaining meetings this year in September, November and December. (The November meeting falls during election week, which could make for a particularly sensitive time.)

Brusuelas said policymakers may have ultimately overreacted to the discouraging data from the first few months of the year. At the time, there was concern that those reports pointed to something more entrenched and sparked concerns about inflation. But with a few months of hindsight, it looks more like typical noise.

“Due to the overreaction, July is off the table,” he said.

Meanwhile, inflation is particularly unpopular with households and businesses that believe the economy isn’t working for them. Speaking to reporters last month, Atlanta Fed President Raphael Bostic said employers in his constituency – which includes Alabama, Florida and Georgia, as well as parts of Louisiana, Mississippi and Tennessee – say labor markets are looser than they were earlier in the year, making it easier to hire employees. But those same companies are also grappling with rising costs just to remain competitive.

“As their cost base increases, they are very uncertain and doubtful that they can pass on anything close to it,” Bostic said. “Their customers have reached a level where they say, ‘We’re at the limit and we can’t do much more.'”