- The Consumer Price Index, a measurement of the average change in prices for a commonly purchased basket of goods and services, dropped 0.1% from May, slowing the annual rate of inflation to 3% from 3.3% in May.
- Investors are now pricing in an 89% chance of at least one rate cut by the September 17-18 Fed meeting, as cooling inflation may allow the Federal Reserve to cut interest rates in the coming months.
- The shelter index rose just 0.2% during June, the slowest monthly increase in three years, indicating progress in a critical area of inflation, though shelter-related price hikes are still running above overall inflation.
CNN — Americans weighed down by fast-rising prices for three years just received some encouraging news on the inflation front. The Consumer Price Index dropped 0.1% from May, helping slow the annual inflation rate to 3% from 3.3% in May, according to the Bureau of Labor Statistics. This marks the first monthly decline since May 2020. On an annual basis, prices are increasing at their slowest pace since June 2023.
Falling Prices Provide Hope
Falling gas prices and drops in new and used car prices helped drive the decline, BLS data showed. The better-than-expected report bolstered hopes the Federal Reserve could cut interest rates sooner, making borrowing less expensive after months at 23-year highs due to the Fed’s inflation fight. “With another good CPI print, the window is open for the Fed to cut rates as early as September, assuming inflation data continues to cooperate,” said Skyler Weinand, chief investment officer at Regan Capital.
Underlying Inflation Also Slows
Excluding food and energy, the closely watched core CPI rose just 0.1% from May, the slowest since August 2021. That nudged the annual core inflation rate down to 3.3% from 3.4%, marking a fresh three-year low. Stocks jumped initially but gave back gains, while Treasury yields fell. Lower yields could benefit consumers, as loans like mortgages are tied to the 10-year yield.
Fed Rate Cut Odds Are Rising
Wall Street is increasingly confident the Fed can cut rates soon thanks to cooling inflation. Investors now see an 89% chance of at least one cut by the September Fed meeting, up from 50% a week ago, according to CME Group’s FedWatch tool. The Fed’s thinking has also shifted as unemployment rose for three straight months to 4.1% in June. “It would be reasonable to cut rates in July, but the Fed won’t move until September,” said Tuan Nguyen, economist at RSM US. “Anything after that risks a hard landing.”
Shelter Inflation Finally Easing
While gas price drops helped cool inflation, progress was also made in the critical shelter area. The shelter index rose just 0.2% in June, the smallest increase in three years. Annually, shelter inflation was 5.2%, the coolest in two years but still above overall inflation. Shelter remains the biggest hurdle for CPI, making up one-third of the index. But cheaper hotels helped sharply cool the shelter index, while rents slowed too. “The shelter component has finally caught up to our predictions,” said Nguyen. “That moderation should continue.”
Retailers Cut Prices As Consumers Pull Back
Many major retailers have recently announced price cuts, a trend likely to persist as consumers become more restrained. “Consumers are increasingly strained, making it harder for businesses to raise prices,” said Sarah House of Wells Fargo. “[Discounting] also pressures other retailers to compete on price as consumers pull back.” Core goods prices fell 0.1% monthly and 1.8% over the past year. Food prices ticked up 0.2% as grocery and restaurant prices rose slightly.
High Inflation Leaves Lasting Impressions
While price gains are slowing, the CPI is still about 20% higher than in February 2020. That kind of sticker shock over three years could leave lasting impressions on consumer behavior, said Michael Weber of the University of Chicago Booth School of Business. “For many consumers, price tags will be permanently higher compared to two or three years ago, given the inflation we’ve witnessed,” he said. The fallout from high prices is also being seen politically, as inflation has dinged President Biden’s economic image ahead of the election.
Conclusion
The June inflation report brought some welcome relief, but prices aren’t falling yet. Consumers have endured three difficult years, and it may take time for inflation to fully cool. Still, the data provides hope that relief may be on the horizon. The Fed appears poised to cut interest rates soon if the trends continue, which could ease the burden on American households.
