U.S. Consumer Inflation Cools To Lowest Since Early 2021

US consumer inflation cooled in June to its lowest rate since early 2021, according to government data released yesterday — an encouraging sign for policymakers battling cost-of-living pressures.

The key inflation gauge, the consumer price index (CPI), rose 3.0 per cent from a year ago last month, the smallest increase since March 2021 and down from 4.0 per cent in May, said the Labor Department.

The US Federal Reserve has raised interest rates rapidly over the last year to ease demand and bring down price growth.

While Fed officials have signalled that further rate hikes are likely needed to bring inflation back to their 2 per cent target, the June CPI report will heighten market doubts about the number of additional increases needed down the line.

“Today’s report brings new and encouraging evidence that inflation is falling while our economy remains strong,” President Joe Biden said in a statement, lauding the progress made while maintaining low unemployment.

In a further positive sign, Labor Department data showed that the monthly “core” rate — excluding the volatile food and energy components — came to its lowest reading since late 2021, at 0.2 per cent.

Wall Street stocks surged after the report, closing higher on hopes that inflation can come down without the world’s biggest economy tipping into a recession.

“The economy is defying predictions that inflation would not fall absent significant job destruction,” Lael Brainard, director of the National Economic Council, said in remarks to the Economic Club of New York.

While “too many Fed officials have made it clear that they think further hikes are needed,” suggesting another bump this month, a good CPI reading could change prospects as to whether a rise in September is still needed, Pantheon Macroeconomics said in a report.

According to the latest Labor Department data, the index for shelter remained the “largest contributor” to the overall monthly CPI increase and the index for car insurance also contributed — but other areas saw declines including airfares and used vehicles.

‘Disinflation’ ahead

“We know rents are going to roll over, over the next several months, so we’re going to see a lot of disinflation coming through the rest of this year,” said Ryan Sweet, chief US economist at Oxford Economics.

“That’s good news for consumers,” he told AFP, adding that he expects the Fed could end its tightening cycle in July.

“The labour market is showing signs of softening, inflation is coming down, we’re still on that path to a soft landing, but it’s a very narrow path,” Sweet said.

The easing of underlying inflation was driven by a “plunge in airline fares” and dip in hotel room rates, along with a drop in used vehicle prices, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Although insurance and repair costs have rocketed over the past year, “flattening demand and rising inventory are now pushing new vehicle prices down” after a surge, he said. Insurance and repair inflation will follow, he added.

Slowing to end quarter

Key parts of inflation highlighted by Fed Chair Jerome Powell, including the core readings for goods and services, have “slowed to end the second quarter,” said Rubeela Farooqi, chief US economist at High Frequency Economics.

“While inflation remains elevated, the deceleration will be welcome news to policymakers,” she added in a note.

But these data are not likely to change the outcome of a Fed officials’ meeting later this month, with a rate hike of 25 basis points the most likely outcome, Farooqi said.

Fed: U.S. Economic Activity Improving

Economic activity in the United States has improved since late May, with robust tourism and travel fuelling growth, the Federal Reserve said yesterday.

“Overall economic activity increased slightly since late May,” the Fed announced in its regular report on economic conditions known as the “beige book,” although warning that growth will likely still be slow in the coming months.

The latest assessment marked an improvement from its previous report, which found US economic activity was “little changed” in April and early May.

The US central bank has recently paused its campaign of interest rate hikes to give policymakers more time to assess the health of the world’s biggest economy — after 10 consecutive increases to its key lending rate.

While inflation has fallen sharply since last year, it remains above the Fed’s long-term target of 2 per cent and the labour market is also historically strong.

Against this backdrop, the Fed has indicated that it expects two more interest rate hikes will be necessary before the end of the year.

Yesterday, the Fed said economic activity either grew or held steady in most of its districts across the country, with the exception of Philadelphia and San Francisco, where activity fell.

“Tourism and travel activity was robust, and hospitality contacts expected a busy summer season,” according to the report, which found that reports on consumer spending were mixed.

Labour demand remained resilient, with most districts “experiencing some job growth,” the Fed added.

However, some regions reported that “hiring was getting more targeted and selective,” with some employers having an easier time finding the staff they needed.

There are signs that wage inflation is beginning to moderate, with contacts in many of the Fed’s districts reporting that pay growth was “returning to or nearing pre-pandemic levels.”

Prices increased at a modest pace overall, according to the beige book, and several Fed districts noted some slowing in the pace of increase.

Recent economic data suggests the United States is faring better than many expected, with fears of a recession receding following a recent upward revision to growth for the first quarter of the year. — AFP

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