US inflation is holding off below 3%. However, prices fell 0.1% in June, leaving the interannual rate at 3.0%, compared with 3.3% the previous month, according to data published Thursday by the Bureau of Labor Statistics, part of the Department of Labor. This is, as requested by Federal Reserve Chairman Jerome Powell, a positive figure that allows the central bank to have greater confidence that inflation is heading sustainably toward the price stability objective of 2%. That, pending additional price and labor market indicators, paves the way for the central bank’s monetary policy committee to lower interest rates in September for the first time in four and a half years.
Analysts had expected a 0.1% rise in prices for the month and a year-on-year rate of 3.1%, which is better than expected. The monthly fall in prices is the first since May 2020, at the height of the pandemic. Meanwhile, 3% is the lowest inflation in a year since that level was reached in June 2023, before picking up again. The 3.8% drop in gasoline prices explains the good performance. The monthly fall in prices is also news for US President Joe Biden, who is seeking re-election in November, although right now he has bigger problems than inflation.
The Fed’s preferred measure of inflation is the PCE index, a deflator of personal consumption expenditures. June’s PCE inflation figure will be released in a few weeks, but its evolution maintains a clear correlation with the consumer price index (CPI), which was released on Thursday. In May, PCE inflation stood at 2.6%, closer to the 2% target.
Thursday’s figures are positive, although the decline in the general CPI is not reflected in the underlying index, which excludes food and energy prices. Even so, the data was also good, with a monthly increase of 0.1%, leaving the interannual rate at 3.3%. This index is above the general index and serves as a clear reminder that the Federal Reserve has not yet won the battle.
The US central bank has approved the most aggressive interest rate hikes since the 1980s to deal with the highest inflation since then. Inflation peaked at 9.1% in June 2022 and fell from there within a year to 3.0% in June 2023. Since then, however, it has become entrenched and even rebounded above that level. This has forced the Federal Reserve to keep interest rates high for longer: they have been in the range of 5.25%-5.5% since July last year, their highest in 23 years. The return to 3% is the best news the central bank could hope for this Thursday.
Positive data
Powell is in no hurry to lower the price of money, but he has shown this week during his two appearances before the US Congress his willingness to start cutting interest rates as soon as the price data is favorable. “The most recent inflation data has shown some modest progress, and more positive data would reinforce our confidence that inflation is moving steadily toward 2%,” he said both in the Senate and in the House of Representatives.
No one is counting on a rate cut at the Federal Open Market Committee (FOMC) meeting later this month, but futures quotes show that investors are placing a high probability on a 0.25-point rate cut at the last meeting of the summer on September 17-18. Moreover, investors are seeing a second rate cut as likely at the December meeting, the last of the year.
The labor market has shown signs of cooling, and Powell underlined this this week. As a result, confidence in rate cuts has increased. “In light of the progress made in both reducing inflation and cooling the labor market over the past two years, elevated inflation is not the only risk we face,” Powell told lawmakers this week. “Easing tight policy too late or too little could unduly weaken economic activity and employment,” he added.
The September meeting is still just over two months away, so it is possible that new data will alter the Fed’s roadmap. What Powell has said will not be taken into account are political considerations. The fact that there is a presidential election on November 5 will not affect the rate cut schedule, he says.
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