Price increases slowed more sharply than expected in June, adding to evidence that high inflation has subsided and potentially clearing the way for the Federal Reserve to lower interest rates that affect everything from mortgages to credit card payments.
The Consumer Price Index rose 3% year over year in June, slower than the 3.3% annual rate the month before. From May to June, prices fell 0.1% — the first time the monthly reading meaningfully declined since May 2020, early in the pandemic.
Thursday’s report from the Bureau of Labor Statistics adds to hopes that the Fed will cut interest rates in September. That would bring some relief to voters ahead of November’s election, which both parties expect could hinge on Americans’ views of an otherwise solid economy.
In remarks to Congress this week ahead of Thursday’s report, Fed Chair Jerome Powell noted the risks of leaving interest rates high for too long but said he wanted to see ‘more good data’ on inflation before making a change.
Thursday’s unexpectedly strong report may provide just that.
“Core” inflation, which excludes volatile food and energy prices, climbed just 0.1% from May to June, the slowest monthly growth since January 2021. Gasoline prices fell 3.8% and used vehicles 1.5%. Shelter costs — which have stubbornly propped up inflation readings for many months — rose just 0.2% in June.
While Fed officials are unlikely to announce any interest rate changes when they gather later this month, the central bank could signal a looming pivot at its annual meeting in Jackson Hole, Wyoming, in August.
The Fed has already been facing pressure to cut rates amid a steadily slowing labor market. The unemployment rate now stands at 4.1%, its highest point of the post-pandemic period and a level not seen since February 2018, excluding the surge in job losses in 2020. While many economists’ recession fears have abated since last year, there is growing concern that unemployment — though still historically low — has climbed for three months straight.
‘The labor market is experiencing a non-recessionary cooling (as it has been since the spring of 2022),’ Guy Berger, director of economic research at the Burning Glass Institute, a research group focused on economic mobility, wrote last week in a Substack note. ‘We’re not at the tipping point into recession yet, but I don’t have a lot of confidence about the distance from that tipping point.’
The Fed uses interest rates to help control the pace of economic growth. Its current federal funds rate is about 5.5%, the highest it’s been since before the 2008 financial crisis. By keeping rates elevated, the Fed has sought to cool overall demand for borrowing for goods and services, thereby slowing price increases.
The elevated rates have largely worked. Inflation has fallen sharply since peaking at 9.1% in June 2022, but it has been stuck around 3% all year. Powell told Congress this week there continued to be ‘modest’ progress toward its 2% goal, and he said inflation expectations remain ‘anchored’ — meaning a low risk of price growth picking up again.
A big reason for that, economists say, is that many consumers’ finances have tightened since early in the pandemic recovery.
‘Increasingly cost-conscious consumers are also likely to limit the extent of price increases across the service sector, while slower growth in input costs, including labor, is reducing the need to do so,’ Wells Fargo economist Sarah House said in a note this week ahead of Thursday’s report.
Some economists and many left-leaning lawmakers say the Fed has already waited too long to cut rates. Pantheon Macroeconomics Chief Economist Ian Shepherdson warned in a recent note that the central bank ‘soon will be rushing to stop a major downturn.’