The U.S. inflation rate wasn’t expected to fall this fast this June. It reached 3 percent compared to 4 percent the previous month, while expectations were pointing to 3.1 percent.
As a result, the U.S. inflation rate reached its lowest since March 2021. However, it still remains higher than the Federal Reserve’s target of 2 percent, according to figures released by the U.S. Department of Labor on Wednesday.
Following this decrease, it is widely expected that the Federal Reserve will announce a 25 basis point increase when it meets on July 24th and 25th.
In just one month, consumer prices rose 0.2 percent compared to 0.1 percent in May.
The monthly pace was lower than analysts had expected, as they had forecasted a 0.3 percent price increase.
Similarly, core inflation, which excludes food and energy prices, slowed down to 4.8 percent on an annual basis, compared to 5.3 percent the previous month, and the rate for one month (0.3 percent) was slightly lower than expected (0.4 percent).
Read more: Will the U.S. inflation fall further?
The Federal Reserve is closely monitoring core inflation, as it is considered a more accurate gauge of where inflation is heading.
However, given that core inflation represents nearly 80 percent of all items in the Consumer Price Index, this rate will need to decrease more rapidly for the Federal Reserve to reach its targeted inflation rate of 2 percent. With the current rate of core inflation slowing down, it is not expected to reach 2 percent until at least 2024.
To tame inflation, the Federal Reserve has attempted to curb spending by making it more costly to borrow money. To do so, they raised the benchmark interest rate from near zero in March 2022 to its current range of 5 percent to 5.25 percent.
However, inflationary pressures from the resilient economy and the labor market continue to be a concern for the Federal Reserve, as the inflation rate remains higher than its 2 percent target.
What are the reasons for the inflation rate falling in June?
The fall of the inflation rate can be attributed to the sharp decline in energy prices, which decreased by 16.7 percent over the course of one year.
While food prices remained relatively high (+5.7 percent on an annual basis), recent months have seen a general stability in prices (+0.1 percent in June).
However, there is a concerning issue, which is the rise in housing prices that also exhibit an above-average rate (+7.8 percent over the year). It seems to be one of the areas where US inflation is concentrated (+0.4 percent during the month).
The implications of this development
The additional slowdown in consumer goods prices has pushed the value of the dollar down in the foreign exchange market, as traders believe that the current pace of inflation gives the Federal Reserve more flexibility to refrain from raising interest rates frequently during its upcoming meetings.
Meanwhile, gold prices rose to $1935.19 per ounce, and U.S. gold futures increased to $1940.50.
Wall Street’s key indicators opened higher as the data raised investors’ hopes that the Federal Reserve is approaching the end of its monetary tightening cycle.
Chair of the Federal Reserve Jerome Powell reiterated several times that multiple interest rate hikes are currently expected. He spoke during a meeting of central bank governors in Sintra, Portugal, at the end of June, mentioning, “at least two, maybe consecutive,” rate increases.
Another member of the Federal Reserve’s monetary policy committee, Austan Goolsbee, estimated that, “there is almost a consensus among all members that we will see one or two increases this year.” She said, “I don’t see anything contradicting that.”
However, the Federal Reserve regularly emphasizes that future increases will depend on the analysis of macroeconomic data, especially the trend of another inflation indicator, the Personal Consumption Expenditures (PCE) index, which they prefer.
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