Inflation fell in June to its lowest annual level in more than two years. This was due to both some deceleration in costs and simple comparisons to a period when price increases hit a more than 40-year high.
The consumer price index, which measures inflation, rose 3% year-on-year, the lowest since March 2021. On a monthly basis, the index, which measures a wide range of prices for goods and services, rose 0.2%.
This compares to Dow Jones estimates for increases of 3.1% and 0.3% respectively.
Excluding volatile food and energy prices, core CPI rose 4.8% yoy and 0.2% mom. Consensus estimates are for corresponding increases of 5% and 0.3%, respectively. The annual rate was the lowest since October 2021.
In summary, the numbers could give the Federal Reserve some breathing room as it seeks to bring down inflation, which at this point in 2022 was about 9% per year, the highest since November 1981.
“Significant progress has been made on the inflation front and today’s report confirmed that inflation is finally cooling as most of the country grapples with warmer outside temperatures,” said George Mateyo, chief investment officer at Key Private Bank. “The Fed will take this report as confirmation that its policies are having the desired effect – inflation has come down while growth has not yet stalled.”
However, central bank policymakers are more focused on core inflation, which is still well above the Fed’s annual target of 2%. Mateyo said the report is unlikely to stop the central bank raising rates again later this month.
Fed officials expect the inflation rate to fall further, especially as the cost of housing, which accounts for about a third of the weight in the consumer price index, falls. However, the Shelter Index is up 0.4% over the last month and 7.8% on a yearly basis. That monthly gain accounted for about 70% of the rise in headline CPI, the Bureau of Labor Statistics said.
“Housing costs, which are a big part of inflation, aren’t going down significantly,” said Lisa Sturtevant, chief economist at Bright MLS. “Because rates were kept so low by the Fed and then raised so quickly during the pandemic, the Federal Reserve’s rate hikes not only reduced demand for housing – as intended – but also severely constrained supply by locking homeowners to homes were they would otherwise have signed up for sale.”
Wall Street reacted positively to the report and futures linked to the Dow Jones Industrial Average rose almost 200 points. Government bond yields fell across the board.
Traders are still pricing in the strong possibility that the Fed will announce a quarter point rate hike at its July 25-26 meeting. However, market prices suggest this will be the last hike as officials pause to allow the series of hikes to impact the economy.
When inflation first began to accelerate in 2021, Fed officials and most Wall Street economists assumed it would be “temporary” or likely to ease once factors specific to the Covid pandemic subsided. These included rising demand for goods over services and supply chain congestion leading to shortages in essentials like semiconductors.
However, when inflation proved more stubborn than expected, the Fed began raising interest rates, eventually raising interest rates by 5 percentage points in a series of ten hikes since March 2022.
The subdued rise in headline CPI came despite energy prices rising 0.6% over the month. However, the energy index fell 16.7% year over year when gasoline prices at the pump were about $5 a gallon.
Grocery prices rose just 0.1% mom, while used car prices, a key source of inflation pick-up in early 2022, fell 0.5%.
Fares fell 3% month-on-month and are now down 8.1% year-on-year.
Easing CPI helped lift workers’ wages, with real average hourly earnings up 0.2% in inflation-adjusted terms from May to June and up 1.2% yoy. During the surge in inflation, which peaked last June, workers’ wages have consistently lagged behind cost-of-living increases.