The annual inflation rate in June dipped to its lowest in over two years, as the slowing increase in costs and comparisons against a period of 40-year high price rises came into effect.
The consumer price index (CPI), a measure of inflation, recorded an increase of 3% compared to last year, which is the smallest growth since March 2021. In the monthly comparison, the index rose by only 0.2%, against the Dow Jones predictions of 3.1% and 0.3% for the year and month respectively.
When the volatile food and energy prices are excluded, the core CPI rose 4.8% from the previous year and 0.2% on a monthly basis. The annual rate was the lowest since October 2021. These figures are lower than the anticipated increases of 5% and 0.3% respectively.
These figures could provide some respite for the Federal Reserve as it grapples with reigning in an inflation rate that, in 2022, hit a 9% annual high, the steepest since November 1981.
Chief Investment Officer at Key Private Bank, George Mateyo, commented that the Fed will see this report as confirmation that their policies are effectively lowering inflation without stalling growth.
However, core inflation, which the central bank policymakers tend to focus on, is still well above the Fed's annual target of 2%. This is unlikely to deter the central bank from proceeding with a rate hike later this month.
The Fed anticipates a continued decline in the inflation rate, particularly as shelter costs, which constitute about a third of the CPI, begin to ease.
Despite this, the shelter index increased 0.4% last month, representing a 7.8% annual increase. The increase in shelter costs accounted for nearly 70% of the headline CPI increase, according to the Bureau of Labor Statistics.
The report led to a positive response from Wall Street, with futures tied to the Dow Jones Industrial Average seeing an upsurge of nearly 200 points.
Traders continue to anticipate another quarter-percentage-point rate hike during the Fed's meeting at the end of July. However, market predictions suggest that this may be the last increase for a while, allowing time for the series of hikes to permeate the economy.
Inflation initially started to accelerate in 2021, with the Fed and most Wall Street economists predicting it to be a transient occurrence, likely to dissipate as Covid-19-specific factors waned. These included a heightened demand for goods over services and supply chain issues that led to a scarcity of key items like semiconductors.
However, when inflation remained higher than expected, the Fed initiated rate hikes, which since March 2022 have resulted in a cumulative rise of 5 percentage points across ten increases.
The muted increase for headline CPI in June occurred even as energy prices rose 0.6% for the month. However, the energy index fell 16.7% from a year ago.
Food prices increased a mere 0.1% on the month, while used vehicle prices, a significant contributor to early 2022 inflation, fell 0.5%. Airline fares dropped 3% for the month, now down 8.1% on an annual basis.
The easing of CPI has given workers a slight boost, with real average hourly earnings (adjusted for inflation) increasing by 0.2% from May to June and 1.2% on a year-on-year basis. Amid the inflation surge that peaked last June, worker wages had consistently lagged behind cost-of-living increases.
Today in precious metals, gold prices rose 1.13% to $1,954.78 per ounce. Silver jumped 3.53% to $23.92 per ounce. Platinum increased by 2.44% to $946.50 per ounce, while Palladium grew by 2.40% to $1,280.00 per ounce. Bitcoin spiked 0.36% to $30,731.00.
What could be the potential economic consequences if the trend of slower inflation continues for the rest of the year?