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U.S. Inflation Cools in June, Paving Way for Potential Fed Rate Cuts

Inflation in the U.S. cooled for the third straight month, setting the stage for the Fed to cut interest rates as soon as September.

In a significant turn of events for the U.S. economy, inflation cooled for the third consecutive month in June, providing a compelling case for the Federal Reserve to consider cutting interest rates later this year. The consumer price index (CPI) dropped by 0.1% from May to June, marking the first monthly decline since May 2020, when the pandemic brought the economy to a halt. Annually, prices rose by 3% in June, down from 3.3% in May, according to the U.S. Labor Department.

This unexpected decrease in inflation has bolstered optimism among economists and Fed officials alike, who see it as a signal that inflationary pressures are easing.

Luke Tilley, chief economist at Wilmington Trust, emphasized the significance of the recent data, stating:

“This confirms that there is very little chance of inflation re-accelerating and that it’s time for some rate cuts from the Fed.”

Inflation Cools as Housing Costs Drop

The slowdown in inflation was driven by several factors, including a notable reduction in housing costs, which rose only 0.3% from May to June, the mildest increase in nearly three years. Additionally, gas prices fell for the second consecutive month, dropping by 3.8% on average nationwide from May. Used car prices, another major contributor to past inflation spikes, decreased by 1.5% and were down 10.1% year-over-year.

Mary Daly, President of the San Francisco Federal Reserve, echoed the sentiment for potential rate cuts, suggesting that the combination of slowing inflation and a cooling job market could justify policy adjustments. “I see it as likely that some policy adjustments will be warranted,” Daly remarked in a conference call with reporters, though she did not specify the timing of such cuts.

Consumer price index twelve month percentage change chart shows U.S. inflation cools trend.

Cost of Living Remains High

Despite the positive trends, the cost of living remains significantly higher than pre-pandemic levels, particularly for essential items such as food, rent, and healthcare. Grocery prices, for instance, ticked up by 0.1% in June, the first increase in five months, and remain 21% higher than in March 2021. This ongoing burden is a source of public discontent and could pose a challenge for President Joe Biden’s re-election campaign.

For many Americans, the high costs of essentials continue to strain household budgets. Deborah Stettler, a 51-year-old single mother from Quincy, Massachusetts, shared her struggles, saying, “Rent has gone up, food has gone up, the pay doesn’t go up. I’m still going to the food pantry for food help because, by the time you pay all your bills, you don’t really have a lot of money left for food.”

Markets React to Increased Rate Cut Odds

The recent inflation data has also had immediate effects on the financial markets. Following the release of the June CPI report, stock market futures rose, while Treasury yields tumbled, reflecting increased investor confidence in the likelihood of upcoming rate cuts.

Chris Larkin, managing director of trading and investing at E-Trade from Morgan Stanley, commented:

“The June inflation report means the Fed is one step closer to a September rate cut. A lot can happen between now and September 18, but unless most of the numbers pivot back into ‘hot’ territory, the Fed’s reasoning for not cutting rates may no longer be justified.”

Furthermore, the latest data showed that real average hourly earnings for workers increased by 0.4% from May to June, although the annual gain was a modest 0.8%. This slight increase in wages, combined with the cooling inflation, suggests that the economic landscape is stabilizing.

Pressure’s on Powell to Cut Rates in September

Fed Chair Jerome Powell, in recent testimony to Congress, acknowledged the cooling job market and its impact on inflation, noting that the labor market is “not a source of broad inflationary pressures.” This marks a shift from previous concerns that rapid wage growth could perpetuate inflation.

As the Federal Reserve prepares for its next meeting, the June inflation figures provide a strong case for policymakers to consider rate cuts.

With most economists and financial markets anticipating an initial cut in September, the coming months will be critical in determining the trajectory of U.S. monetary policy and the broader economic recovery.

Read Next: Fed Chair Powell’s Senate Testimony: Key Takeaways and Market Implications

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Featured Image Source: U.S. Department of Labor Shawn T Moore FlickrFeatured Image License: Attribution 2.0 Generic

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