US inflation slows to 3% in June

Washington — US consumer prices fell for the first time in four years in June amid lower petrol costs and moderating rents, putting disinflation back on track and drawing the Federal Reserve another step closer to cutting interest rates in September.

The second straight month of benign consumer price readings reported by the labour department on Thursday should help to bolster confidence among officials at the US central bank that inflation is cooling after surging in the first half of the year.

The report also showed a measure of underlying inflation posting the smallest increase since August 2021 on a monthly basis. Financial markets saw a high probability of the Fed starting its easing cycle in September.

“Barring rogue price data in July, the Fed has a chequered flag to reduce rates in September,” said Brian Bethune, an economics professor at Boston College. “This guidance will be solidified at the July meeting.”

The consumer price index (CPI) dipped 0.1% last month, the first drop since May 2020, after being unchanged in May, the department’s Bureau of Labor Statistics said. The CPI was weighed down by a 3.8% drop in petrol prices, which followed a 3.6% decrease in May. Shelter costs, which include rents, increased a moderate 0.2% after advancing 0.4% in May.

Food prices rose 0.2% after edging up 0.1% in May. In the 12 months to end-June, the CPI slowed to 3%, the smallest gain since June 2023. That followed a 3.3% advance in May.

Economists had forecast the CPI ticking up 0.1% and gaining 3.1% year on year.

The annual increase in consumer prices has slowed from a peak of 9.1% in June 2022. June’s moderation narrowed the CPI gap with the measures tracked by the Fed for its 2% inflation target. The Personal Consumption Expenditures (PCE) price indices increased 2.6% in May.

The CPI report followed news last week that the unemployment rate rose to a two-and-a-half year high of 4.1% in June from 4% in May.

Economic growth has also slowed in response to the central bank’s hefty rate hikes in 2022 and 2023, with second-quarter GDP forecast near the 1.8% annualised rate that policymakers view as the noninflationary growth pace.

Fed Chair Jerome Powell has acknowledged the recent improving trend in price pressures, but told legislators this week he was not yet ready to declare inflation had been beaten and that “more good data” would strengthen the case for rate cuts.

Financial markets saw a roughly 85% chance of a rate cut at the Fed’s September meeting, compared with about a 70% chance seen before the report. US Treasury yields fell. The dollar slipped against a basket of currencies.

The central bank has maintained its benchmark overnight interest rate in the 5.25%-5.50% range since last July. It has hiked its policy rate by 525 basis points since 2022.

Reuters