By The latest data from the Labor Department reveals that U.S. inflation has eased to its slowest pace in over two years, with underlying price pressures cooling more than expected.
Slower Inflation Growth
In June, the consumer-price index (CPI) recorded a 3% increase from the previous year, which is significantly lower than the peak of 9.1% observed in June 2022 and down from May’s 4% figure. The last time inflation was close to 3% was in March 2021.
Above Target, but Expected to Rise
Despite the decrease in inflation, it continues to remain above the Federal Reserve’s target of 2%. In light of recent indications of stronger-than-anticipated economic activity, Fed officials have signaled their intention to raise interest rates to a 22-year high during their upcoming July 25-26 meeting. The latest inflation report is not expected to alter this course.
Previous Rate Hike and Future Plans
During their previous meeting, officials opted to keep their benchmark federal-funds rate within a range of 5% to 5.25%. This marked the first pause in rate increases after a streak of 10 consecutive hikes since March 2022, when rates were raised from near zero. In the June meeting, it was projected that two additional rate hikes would take place later this year.
Core Consumer Prices
The core consumer prices, which exclude volatile food and energy categories, saw a 4.8% increase in June compared to the previous year. This represents the slowest growth rate since October 2021 and a decline from May’s 5.3% figure. Economists had initially estimated a 5% rise in core prices.
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Consumer Price Increase Slows Down, Ease in Price Pressures
In June, overall consumer prices saw a modest increase of 0.2% compared to the previous month, marking a slight improvement from May’s 0.1% gain. Meanwhile, core consumer prices also rose by 0.2%, indicating the smallest one-month increase since August 2021. This suggests that underlying price pressures are gradually easing.
The decline in prices for used cars and airline fares played a significant role in offsetting the rise. However, prices for car insurance and recreation experienced an upward trend. Additionally, although there was an increase in rent for the month of June, it was at the slowest pace seen since early 2022.
Federal Reserve officials remain determined to tackle persistently high core inflation and view core prices as a more reliable indicator of future inflation compared to the overall inflation rate.
The surge in core inflation can be attributed to rising car prices, strong demand for labor-intensive services, and the earlier spike in housing-rental prices.
Leo Feler, chief economist at Numerator, highlighted that services like haircuts, car repairs, and car insurance have been particularly affected by sticky inflation.
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