Consumer prices in the United States experienced a modest increase in June, marking the smallest annual rise in over two years. Despite inflation continuing to subside, it is unlikely to deter the Federal Reserve from resuming its interest rate hikes later this month.
The Labor Department’s latest report reveals that the Consumer Price Index (CPI) rose by 0.2 percent last month, slightly higher than the 0.1 percent increase in May. This rise in the CPI was mainly driven by increased gasoline prices and rents, which offset the decline in the price of used motor vehicles.
Over the 12 months leading up to June, the CPI saw a 3.0 percent gain. This represents the smallest year-on-year increase since March 2021, following a 4.0 percent rise in May.
Economists surveyed by Reuters had projected a 0.3 percent increase in the CPI for June, with a year-on-year climb of 3.1 percent.
While annual consumer prices have significantly decreased from their peak of 9.1 percent in June 2022, which marked the largest increase since November 1981, inflation remains well above the Federal Reserve’s 2 percent target, particularly due to the tight labor market conditions.
Although employment gains in June were the smallest in 2.5 years, the unemployment rate remained close to historically low levels, and wage growth remained strong. Financial markets have already priced in a 25 basis points interest rate increase at the Federal Reserve’s policy meeting scheduled for July 25-26, according to CME’s FedWatch tool.
Following its most rapid monetary policy tightening campaign in over four decades, the Federal Reserve opted not to raise rates in June. Since March 2022, the central bank has increased its policy rate by a total of 500 basis points.
The latest data reveals an improving inflation environment, with a moderation in the pace of underlying price increases. Excluding food and energy categories, the core CPI rose by 0.2 percent in June. This is the first time in six months that the core CPI did not post monthly gains of at least 0.4 percent. Over the 12 months leading up to June, the core CPI saw a 4.8 percent increase, down from a 5.3 percent rise in May.
Economists anticipate that core inflation will continue to recede in the coming months, driven by a cooling labor market and independent indicators showing a downward trend in rents. It’s worth noting that rent measures in the CPI typically lag behind independent gauges by several months.
In June, the Institute for Supply Management’s measure of prices paid by services businesses for inputs dropped to its lowest level since March 2020. Economists consider the ISM services prices paid measure as a reliable predictor of personal consumption expenditures (PCE) inflation. The correlation between this price gauge and the core PCE services excluding housing is closely monitored by Federal Reserve officials as they assess progress in their fight against inflation.
