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Inflation at 3% flags end of emergency, turning point for Fed

A person shops near Chamoy sauce bottles displayed for sale in a supermarket on Feb. 13, 2023, in Los Angeles. At 3% in June, consumer-price inflation is now just one-third of the level it reached a year ago. (Mario Tama/Getty Images/TNS)

The US inflation rate slid to a more than two-year low, a major step toward ending the cost-of-living emergency — and possibly the Federal Reserve’s historic monetary tightening, too.

At 3% last month, consumer-price inflation is now just one-third of the level it reached a year ago, which was the highest in four decades. And the details for June were also better than expected, with key measures of underlying inflation coming in below forecasts.

That’s after a period of two years or so when the great inflation debate hogged the headlines and loomed large in everything from US presidential politics to bar-room conversations.

None of this means it’s game over in the fight against price pressures — especially for the Fed, which is widely reckoned to be locked-in to another interest-rate increase later this month. Still, there’s now a better-than-even chance that a July 26 hike, which would take the benchmark US rate to 5.5%, could be the last in quite a while.

That’s the way markets were betting after Wednesday’s data. Yields on short-term Treasury yields plunged, stocks rose, and the dollar was headed to the lowest in more than a year by one measure – all in anticipation that the Fed might ease up.

‘Coming to End’

“The new data could give the Fed reason to debate whether any further rate hikes after this month are needed,” wrote Ryan Sweet, chief US economist at Oxford Economics. “This tightening cycle by the Fed is likely coming to an end.”

What Bloomberg Economics Says…

“June’s soft CPI report comes at a pivotal moment, when the Fed is close to end of its hiking cycle. It’s not only base effects working in favor of cooling inflation — the softening economy is also playing a role. While the FOMC will most likely hike at the July 25-26 meeting, more officials may become skeptical that further hikes are needed after that.”

— Anna Wong and Stuart Paul

To be sure, inflation remains far above the Fed’s 2% target, and the last phase of getting it down might turn out to be the hardest.

What’s more, Americans are still paying far more than they were before the pandemic for a range of goods and services – and that pain isn’t forecast to end anytime soon. President Joe Biden, gearing up for a re-election battle next year, will likely find that high prices remain a weapon his Republican rivals can use against him.

For the Fed, there are still causes for concern. For one thing, while inflation is moving in the right direction, math did flatter the latest figures.

Known as “base effects,” the comparison of the consumer price index to June 2022 — when Russia’s invasion of Ukraine had just driven a rapid run-up in energy prices — made the slowdown look particularly dramatic. In fact, annual price growth could very well edge up slightly in the coming months as comparisons to last year become less favorable.

‘Back Off Too Soon’

One CPI print, even if better than expected, is unlikely to hold great sway with Fed officials. Speaking after the latest figures were released, Richmond Fed President Thomas Barkin reiterated the central bank’s commitment to restoring price stability.

“Inflation is too high. Our target’s 2%,” Barkin said at an event Wednesday after the report. “If you back off too soon, inflation comes back strong, which then requires the Fed to do even more.”

A large part of what’s keeping inflation elevated — as well as powering the rest of the economy — is a resilient labor market. Employers continue to add jobs at a robust pace and wage gains are still strong, enabling Americans to keep spending.

Housing costs contributed to over 70% of the monthly advance in June, while prices for airline fares and used cars declined. Grocery prices, which have been a key source of financial strain for American families, were unchanged from a month earlier.

A closely watched measure of services prices, which strips out energy and housing, was little changed in June from the prior month. From a year ago, it decelerated to a 4% advance, also the smallest increase since late 2021.

Add it all up, says Jennifer Lee — senior economist at BMO Capital Markets — and it amounts to some “breathing room” for the Fed.

Assuming additional inflation reports between now and September show a similar trend, she says, “this definitely gives them the justification to remain on the sidelines.”


© 2023 Bloomberg L.P

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