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Inflation cooled significantly in June, offering some of the most hopeful news since the Federal Reserve began trying to tame rapid price increases 16 months ago — and boosting the chances that the central bank might be able to stop raising interest rates after its meeting this month.
The Consumer Price Index climbed 3 percent in the year through June, according to data released Wednesday, less than the 4 percent increase in the year through May and just a third of its roughly 9 percent peak last summer.
That overall measure is being pulled down by big declines in gas prices that could prove ephemeral, which is why policymakers closely watch a more slimmed-down version: the change in prices after stripping out food and fuel costs. That metric, known as the core index, offered news that was even better than what economists had expected.
The core index climbed 4.8 percent compared with the previous year, down from 5.3 percent in the year through May. Economists had forecast a 5 percent increase. And on a monthly basis, it climbed at the slowest pace since August 2021.
Slower inflation is unquestionably good news, because it allows consumer paychecks to stretch further at the gas pump and in the grocery aisle. And if inflation can come down sustainably without a big increase in unemployment or a painful economic recession, it could allow workers to hang on to the major gains they have made over the past three years: progress toward better jobs and pay that has helped to chip away at income inequality.
The White House, which has spent over a year on the defensive over rising prices, celebrated the fresh report, with President Biden calling the current economic moment “Bidenomics in action.” And stocks soared as investors bet that the Fed would be able to be less aggressive in its fight against inflation — even halting its interest rate increases after a final July move — in light of the new data.
“This is very promising news,” said Laura Rosner-Warburton, senior economist and founding partner at MacroPolicy Perspectives. “The pieces of the puzzle are starting to come together. But it’s just one report, and the Fed has been burned by inflation before.”
Fed officials are likely to avoid declaring victory just yet. Policymakers are still trying to assess whether the moderation is likely to be quick and complete. They do not want to allow price increases to linger at slightly elevated levels for too long, because if they do, consumers and businesses could adjust their behavior in ways that make more rapid inflation a permanent feature of the economy.
That’s why officials have signaled in recent weeks that they are likely to raise interest rates at their meeting on July 25 and 26. Policymakers had also indicated that one or more additional rate moves could be warranted after that.
“Inflation is too high,” Thomas Barkin, the president of the Federal Reserve Bank of Richmond, said Wednesday in a speech in Maryland, according to Bloomberg. “If you back off too soon, inflation comes back strong, which then requires the Fed to do even more.”
But economists and investors saw less of a chance that the Fed would raise rates again later this year in light of the fresh data.
Policymakers have already slowed down the pace of rate moves sharply, skipping an adjustment at the June meeting. Assuming they hold off again in September, that could mean it would be November before they have to seriously debate lifting borrowing costs again — and by then, success in tamping down inflation could be clear.
“They don’t want to unleash animal spirits too quickly here and have everyone go bananas,” said Julia Pollak, chief economist at ZipRecruiter. But by November, “it may be clear in the data that their job is done.”
The details of the June report offered reasons for optimism. Inflation slowed down as a few key products and services posted steep price declines. Airfares fell 8.1 percent from the previous month, and used cars and trucks were down 0.5 percent. New vehicle prices were flat compared with May.
Not all of those changes will necessarily last: Airline tickets, for instance, are not expected to continue to decline as sharply as they did in this report. But for the Fed, there were other encouraging signs that the cool-down is broad enough to prove sustainable.
For one thing, the cost of housing as measured by the Consumer Price Index — which relies on rent prices — is coming down sharply. That is expected to continue in coming months. An index tracking the rent of primary residences slowed to a 0.46 percent change in June, the weakest increase since March 2022.
Car prices are also stabilizing, and in some cases falling. After years in which semiconductor shortages and other parts problems limited supply, making it hard to meet booming demand, discounting is making a comeback on car dealer lots. Inventories are rebounding, and consumers have a less voracious appetite for new cars in particular.
“It’s different from the past couple of years, and even different from the fall,” said Beth Weaver, who runs a Buick GMC car dealership in Erie, Pa. “Interest rates have certainly weighed on demand.”
And more broadly, price increases for a basket of services excluding energy, food and housing costs — a metric that the Fed watches very closely — continued to slow in June. That progress comes even as unemployment is hovering near its lowest level in half a century and hiring remains stronger than before the pandemic.
Fed interest rate increases work to slow inflation partly by slowing the job market and holding back wage increases, so the Fed’s fight against inflation and the strength of the labor market are closely tied.
“The economy is defying predictions that inflation would not fall absent significant job destruction,” Lael Brainard, the director of the National Economic Council, said during a speech on Wednesday. “This economy is delivering strong results for America’s middle class.”
Republicans highlighted that inflation is still higher than usual — a fact that has been biting into consumer confidence, though it may become less salient as consumers feel relief from cheaper fuel and find that they can replace their aging cars without facing eye-popping price tags.
“Inflation that is almost double the Federal Reserve’s target is not a win for American wallets and budgets,” Representative Jason Smith, a Missouri Republican and chairman of the House Ways and Means Committee, said in an emailed statement, referring to the core inflation rate.
Inflation does remain above the rate of increase that was normal before the 2020 pandemic, and it is still much faster than the Fed’s 2 percent goal. The Fed defines that target using a separate inflation measure, the Personal Consumption Expenditures index. That gauge is also slowing notably, and its June reading is scheduled for release on July 28.
Even if central bankers are taking the slowdown cautiously — cognizant that price increases have slowed and then accelerated again before — many commentators welcomed the fresh data point as the latest sign that the economy might be able to slow gently.
Officials at the Fed have been trying to engineer a “soft landing,” in which inflation slows gradually and without requiring a big jump in the unemployment rate. Jerome H. Powell, the Fed chair, has repeatedly said there was a “narrow path” to achieving one: There are few if any historical examples of the Fed wrestling significant inflation lower without a downturn.
Challenges continue to loom. The economy has momentum, and the job market is strong, which could give companies the wherewithal to keep increasing prices. The war in Ukraine could always intensify, pushing up commodity prices.
But there are also factors that could help out: China’s rebound has been weaker than expected, which means that fewer buyers are competing for goods in global markets. Consumers are buying fewer retail goods, and while spending on services is not plummeting, it has been gradually slowing.
And as those trends combine with inflation that is easing more convincingly, the odds of a gentle deceleration may be improving.
“Powell’s saying is that ‘it’s a narrow path to a soft landing,’” said Michael Feroli, chief U.S. economist at J.P. Morgan. “It’s looking maybe a little wider now.”
Alan Rappeport, Joe Rennison and Lydia DePillis contributed reporting.
Posted on 12 Jul 2023 23:55 link