Inflation Cools Sharply in June, Good News for Consumers and the Fed
Inflation Cools Sharply in June, Good News for Consumers and the Fed
This is some of the most encouraging news since the Federal Reserve began trying to curb rapid price increases 16 months ago. It also raises the likelihood that the central bank would be able to stop hiking interest rates after its meeting this month. Inflation dropped sharply in June, delivering some of the most promising news since the Federal Reserve began trying to tame rapid price increases.
According to data that was issued on Wednesday, the Consumer Price Index increased by 3 percent in the year leading up to June, which is less than the 4 percent increase in the year leading up to May and about a third of its around 9 percent peak during the summer of last year.
This overall measure is being dragged down by significant drops in petrol prices, which may prove to be temporary. As a result, policymakers are paying special attention to a version that has been simplified further: the change in prices after food and fuel costs have been subtracted. This statistic, which is known as the core index, revealed information that was much more favourable than what economists had anticipated would be the case.
In comparison to the previous year,
the core index increased by 4.8 percent; this is a decrease from the 5.3 percent annual growth rate seen through May. Economists had anticipated a rise of 5 percent in the price. In addition, on a monthly basis, it increased at the rate that was the least rapid since August of 2021.
A reduction in the rate of inflation is definitely welcome news for consumers, since it means their paychecks will go farther when making purchases at the supermarket and the petrol station. And if inflation can be brought under control in a sustainable manner without leading to a significant increase in unemployment or a harsh economic recession, it could allow workers to keep the considerable gains they have earned over the past three years. These gains include progress towards better jobs and pay, which has contributed to a reduction in income inequality.
The White House, which has spent more than a year on the defensive over rising prices, praised the new report, and Vice President Joe Biden referred to the present economic moment as “Bidenomics in action.” In light of the new information, investors placed bets that the Federal Reserve would be able to be less active in its fight against inflation, even pausing its interest rate hikes after making their last move in July, which caused the stock market to surge.
“This is very promising news,”
remarked MacroPolicy Perspectives senior economist and founding partner Laura Rosner-Warburton in response to the recent development. “The disparate elements of the puzzle are gradually starting to cohere. However, this is only one report, and the Federal Reserve has been caught off guard by inflation in the past.
It is possible that Fed officials will wait a little while longer before proclaiming triumph. The decision-makers in charge of policy are still attempting to determine whether or not the calm will come quickly and completely. They do not want to allow price increases to remain at slightly raised levels for an excessive amount of time because if they do, consumers and businesses might modify their behaviour in ways that make more rapid inflation a permanent characteristic of the economy. Therefore, they do not want to allow price increases to remain at slightly elevated levels for an excessive amount of time.
Because of this, government officials have been sending signals over the past several weeks indicating that they are likely to raise interest rates when they meet on 25 and 26 July. The decision-makers in charge of monetary policy also indicated that one or more additional rate moves might be necessary after that.
According to Bloomberg, Thomas Barkin, president of the Federal Reserve Bank of Richmond, warned Wednesday in a speech in Maryland that “Inflation is too high.” Barkin’s comments were reported to have been made by Bloomberg. “If we pull back too soon, inflation will come back strong, requiring the Federal Reserve to do even more,”
However,
in light of the newly released statistics, analysts and investors now see less of a possibility that the Federal Reserve will raise interest rates again later this year.
The pace of interest rate changes has already been significantly slowed down by policymakers, and they skipped an adjustment at the meeting in June. If they refrain from doing so once more in September, they won’t be forced to have another real discussion about raising interest rates until November. By that time, it should be evident whether or not they have been successful in bringing inflation under control.
“They don’t want to unleash animal spirits too quickly here and have everyone go bananas,” said Julia Pollak, who is the chief economist at ZipRecruiter. By November, on the other hand, “it may be clear in the data that their job is done.”
The information contained in the report from June provided grounds for hope. The rate of inflation fell to a lower level as a few essential goods and services experienced significant price reductions. When compared to the previous month, airfares saw a decrease of 8.1%, while prices for used automobiles and trucks went down by 0.5%. In June, pricing for brand-new cars were unchanged from May levels.
