Decline of Inflation in the U.S. in June Fuels Expectations for Interest Rate Cuts

Inflation in the U.S. significantly cooled in June, further strengthening the confidence of Federal Reserve officials that they may soon reduce interest rates, reports Bloomberg.

The so-called core consumer price index, which excludes food and energy costs, rose by 0.1 percent compared to May, marking the smallest increase since August 2021, according to figures from the U.S. Bureau of Labor Statistics. Overall prices increased by 3 percent compared to the previous year, a decline from 3.3 percent in May, which is also the slowest pace in more than three years, according to data released on Thursday. American economists believe that the core indicator is a better gauge of underlying inflation than the overall consumer price index (CPI). This indicator fell by 0.1 percent compared to the previous month — the first decline since the onset of the pandemic, driven by lower gasoline prices — and by 3 percent compared to last year.

The data further confirms that inflation has returned to its downward trend after a sharp rise earlier in the year. Following last week’s report showing the third consecutive month of rising unemployment, this data should keep the Federal Reserve on track to lower interest rates later this year. Fed Chair Jerome Powell, in testimony before lawmakers this week, avoided signaling when a rate cut might occur and insisted that policy moves would be guided by fresh incoming data. After the CPI report, traders still believed that the central bank would most likely lower borrowing costs in September, while futures contracts on stocks and government bonds rose.

Is Inflation Really Under Control?

After inflation reached a 40-year high of 9.1 percent in mid-2022, it significantly eased last year but unexpectedly rose in the first quarter. However, starting in April, price growth began to gradually slow. Prices for goods such as used cars, furniture, and appliances generally fell as pandemic-related supply chain issues subsided. But costs for services such as rent, auto insurance, and healthcare continue to rise. This is partly because wage growth for employees has been driven by a labor shortage caused by COVID, and this is now gradually slowing as many employers have passed their higher labor costs onto consumers.

By December, Barclays expects annual inflation to slow to 3 percent, with the core index falling to 3.2 percent — still significantly above the Fed’s target of 2 percent.

Will Interest Rates Fall in 2024?

Federal Reserve Chair Jerome Powell acknowledged recent progress regarding inflation but stated that officials are looking for more evidence that price increases are approaching the Fed’s 2 percent target before they begin to lower interest rates.

At a Senate hearing this week, Powell said that the central bank could also cut rates if employment unexpectedly weakens. The labor market, he added, ‘has really cooled significantly,’ reinforcing economists’ forecasts for a rate cut in September.

Although the economy created 206,000 new jobs in June, the private sector added only 136,000, with gains for previous months revised significantly lower, and the unemployment rate jumped above 4 percent for the first time since November 2021.

From March 2022 to July 2023, the Fed raised its benchmark short-term rate from nearly zero to a 23-year high of 5 to 5.25 percent to help curb inflation, keeping the rate stable last year.

A Fed rate cut would lower borrowing costs for consumers and businesses, but it would also reduce yields on bank savings accounts that have become more generous after years of negligible returns.