In a development that raises a glimmer of hope for those pushing for the Federal Reserve to leave its benchmark interest rate alone, consumer prices saw their smallest annualized gain in more than two years in June, according to the U.S. Bureau of Labor Statistics.
The Consumer Price Index (CPI), which tracks national inflation, rose by 0.2% month over month in June, coming in under consensus expectations. Both the Dow Jones and a group of economists polled by Reuters predicted an increase of 0.3% from the preceding month.
On an annual basis, the CPI’s all-items index increased 3%, marking the smallest 12-month gain in the metric since March 2021. This figure also undershot forecasts from Reuters experts and the Dow Jones, both of whom estimated an annual gain of 3.1%.
Core inflation, which differs from the all-items index by omitting the more volatile price fluctuations in the food and energy sectors, remains higher. It was up 0.2% month over month and 4.8% year over year. Fed officials favor core inflation as a metric due to its stability compared to the all-items index, and even with its improvement, it remains far above the central bank’s stated 2% target. But like headline inflation, core inflation also beat expectations, with a consensus projection of 5% year over year and 0.3% month over month. Moreover, the annual rate of core inflation hit its lowest point since October 2021.
Core prices were helped by a substantial decrease in prices for travel-related services, including airfares and hotels. Prices for used vehicles fell 0.5%, while those for new vehicles were essentially unchanged.
Price moderation appears sustainable and likely to continue, according to commentary from economists at Wells Fargo.
“While the sharp drop in travel prices will be hard to repeat, the decline in vehicle prices has more room to run, and the ongoing disinflation in primary shelter should continue into the second half of this year,” bank economists Sarah House and Michael Pugliese wrote. “More broadly, the expanding supply side of the economy and slowing demand growth are helping to slow inflation from the blistering rates seen in 2021 and 2022.”
The report is a development that indicates measurable progress in the inflation fight and positive news for Fed watchers in rate-sensitive sectors of the economy like real estate. Unfortunately, even with evidence of progress, it’s likely that the central bank will need further proof before deciding against a return to interest rate escalation.
Still, Marty Green, principal at mortgage law firm Polunsky Beitel Green, is optimistic about the impact of the new data.
“Today’s CPI numbers will be welcome news to the Federal Reserve,” he said. “These numbers should confirm that the Fed’s rate-hike campaign is continuing to achieve the desired results and should be nearing its end. However, when the Fed meets later this month, the expectation is still that it will increase the federal funds rate by another quarter point.
“The Fed understands that fighting inflation is a bit like fighting a fire. Just because the flames have calmed down for now doesn’t mean the ingredients for a flare-up aren’t still there. But the continued progress on the inflation front should relieve the pressure on the Federal Reserve to tighten interest rates further after the July increase, which should in turn have a positive impact on mortgage rates.”
