WASHINGTON (Reuters) – U.S. consumer prices rose modestly in June and posted their smallest annual increase in more than two years as inflation eased further, but perhaps not fast enough to dissuade the Federal Reserve from resuming rate hikes this month.
The report from the Labor Department on Wednesday also showed that core consumer prices posted their smallest monthly gains since August 2021. A sharp slowdown in core inflation sparked a rally in stock and bond markets, as investors persuaded the US central bank’s fastest tightening monetary policy cycle. Since the eighties it has been coming to an end.
“Inflation is not dead, but the extraordinary pandemic push of prices from shortages and a shift to stay-at-home purchases is clearly over, and for the first time the Federal Reserve has the upper hand in its fight against inflation,” said Christopher Rupke. Chief Economist at FWDBONDS in New York.
The Consumer Price Index rose 0.2% last month after rising 0.1% in May. Shelter, which includes rents, accounted for 70% of the CPI rise last month. There were also increases in auto insurance rates as well as petrol prices, which rose 1.0%. These gains were offset by lower prices for used cars and trucks.
Food prices increased by only 0.1%. Grocery food prices were unchanged amid further declines in the cost of eggs as well as cheaper meat and fish, which offset a 0.8% increase in fruits and vegetables. But eating out still costs more.
In the 12 months through June, the CPI rose 3.0%. This was the smallest year-on-year increase since March 2021 and followed a 4.0% rise in May.
Economists polled by Reuters had expected the consumer price index to rise 0.3 percent last month and 3.1 percent on an annual basis.
Annual inflation is a third of what it was last June, when prices rose 9.1%, which was the largest increase since November 1981 and marked a peak year-on-year CPI rate.
CPI is slowing year-on-year in part as last year’s big hikes are excluded from the calculation.
The cooling of inflation has also increased the purchasing power of consumers. Inflation-adjusted weekly earnings for private sector workers rebounded 0.5% and rose 0.6% year-over-year.
President Joe Biden said the inflation and wage data are evidence that his economic policy, which economists have dubbed “BedAnomics,” was getting results and vowed to “continue to fight for lower costs for families every day.”
However, inflation remains well above the Fed’s 2% target, with the labor market still tight. Although employment gains were the smallest in 2-1/2 years in June, the unemployment rate fell near historically low levels and wage growth was strong. However, falling inflation has added to cautious optimism that the economy can avoid a long-awaited recession.
It also strengthened the argument against raising interest rates. The US central bank has indicated that it will raise interest rates twice this year, including one expected this month.
The moderation in price pressures was also acknowledged in the Fed’s Beige Book report on Wednesday, which found that “contacts in some regions indicated reluctance to raise prices as consumers became more sensitive to prices, while others reported that strong demand allowed businesses to by preserving their margins.”
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury bond prices rose.
Kernel hypertrophy slow down
Financial markets have priced in a 25 basis point rate hike at the Federal Reserve’s policy meeting on July 25-26, according to CME’s FedWatch tool.
The central bank skipped raising interest rates in June after raising interest rates by 500 basis points since March 2022.
“We have a lot of data between now and the September meeting,” said Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance in Charlotte, North Carolina. But evidence is mounting that the Fed will “watch and wait” after it raises interest rates this month.
The improvement in the inflation environment was confirmed by the moderation in the pace of increase in core prices.
Excluding the volatile food and energy categories, the CPI rose 0.2% in June, the smallest rise since August 2021. It was the first time in six months that the core CPI did not post a monthly gain of at least 0.4%.
Core CPI was lifted by a 0.4% increase in shelter costs.
Owner’s equivalent rent, a measure of the amount homeowners will pay for rent or earn from renting their properties, rose 0.4%. This was the smallest rise in OER since December 2021 and followed a 0.5% increase in May. Hotel and motel room prices decreased by 2.3%.
The cost of auto insurance jumped 1.7%, while clothing prices rose 0.3%. However, the prices of used cars and trucks decreased by 0.5% and the cost of new cars was unchanged. As a result, commodity prices fell 0.1% after rising 0.6% in May.
Airline tickets were 8.1% cheaper, marking the biggest drop in nearly a year. There were also declines in the prices of telecommunications services, furnishings and household operations.
Health care costs did not change, as did prescription drug prices.
Services prices increased by 0.3%. It rebounded 0.2% excluding rents, reversing the previous month’s decline.
In the 12 months through June, the core CPI rose 4.8%. This was the smallest year-over-year gain since October 2021 and followed a 5.3% increase in May.
Core inflation is expected to continue to ease in the coming months, with the labor market slowing and independent measures showing rents on a downward trend. Rental actions in the CPI tend to lag independent measures by several months.
The Institute for Supply Management’s measure of the prices service companies pay for inputs in June fell to the lowest level since March 2020. The measure is seen as a good indicator of PCE inflation, and is being tracked closely by policymakers.
“For the first time in this hike, the light of price stability is starting to shine brighter at the end of the tunnel,” said Michael Gregory, deputy chief economist at BMO Capital Markets in Toronto.
(Reporting by Lucia Motecani) Editing by Chizu Nomiyama and Andrea Ricci
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