The rising cost of US goods and services slowed to a two-year low in June, a sign that inflation is continuing to ease as the economy responds to the US Federal Reserve’s rapid increases in interest rates.
The latest consumer price index (CPI) figures, which measure the prices of a basket of goods and services, increased 3% over the last year. This was the smallest increase since March 2021 and down from a four-decade high of 9.1% in June 2022 as pandemic supply chain issues clashed with burgeoning consumer demand.
Even though inflation has continued to go down, price increases still remain higher than the Fed’s 2% annual target rate, meaning more interest rate hikes could come.
As has been the case for much of the last year, the drop in inflation can largely be attributed to a fall in energy prices, which ticked up significantly in 2022 immediately after Russia’s invasion of Ukraine. Energy prices fell 16.7% over the last year, with gas prices specifically falling 26.5%.
While inflation has cooled significantly since its peak last year, core inflation – which measures prices minus the volatile energy and food industries – has consistently hovered above the overall inflation rate. But June saw the lowest core inflation rate since 2021, a sign that overall prices are cooling. Core inflation hit 4.8% in June, rising just 0.2% over the last month – the smallest monthly increase since August 2021. Housing prices, which soared during the pandemic, still remain a big driver of core inflation with prices going up 7.8% over the last year.
Fed officials have signaled that further interest rate hikes are still possible. Since March 2022, the Fed has increased interest rates 10 times, driving rates up to between 5% and 5.25%. In June, the Fed paused its hike for the first time since it started raising rates as officials said they needed more time to determine the rate rises’ impact on the economy.
So far the jobs market has shaken off the rate rises – increases many economist feared would trigger layoffs as companies cut back. In June, 209,000 jobs were added, the smallest gain since December 2020 but still the 30th consecutive month of jobs gains. The unemployment rate decreased slightly to 3.6%, around its pre-pandemic level. Wages also rose 4.4% in June compared with a year earlier.
What this means for the Fed is that the economy has been slowing, but probably not at the pace that would get inflation down to 2% any time soon.
“Over the past year, we have taken forceful actions to tighten the stance of monetary policy,” the Fed chair, Jerome Powell, told Congress during testimony in June. “We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do.”
Economists expect there is a high likelihood that the Fed will raise interest rates again by a quarter point at their next meeting 25-26 July, which would bring rates up to 5.25% to 5.5%.
