US economy shifts into disinflation mode; consumer prices rise modestly

WASHINGTON, July 12 (Reuters) – U.S. consumer prices rose modestly in June and registered their smallest annual increase in more than two years as inflation eased further, but perhaps not strongly enough. to prevent the Federal Reserve from continuing to raise interest rates this month.

The report from the Labor Department on Wednesday also showed underlying consumer prices posting their smallest monthly gain since August 2021. A substantial slowdown in underlying inflation sparked a rally in markets. in stocks and bonds, with investors convinced of the fastest tightening cycle of US monetary policy. since the 1980s is almost over.

“Inflation is not dead, but the extraordinary pandemic push of prices from shortages and shifts to stay-at-home purchases is clearly over, and the Fed for the first time has the upper hand in its inflation fight,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

The CPI gained 0.2% last month after rising 0.1% in May. Housing, which includes rents, accounted for 70% of the CPI increase last month. There was also an increase in motor vehicle insurance as well as the price of gasoline, which increased by 1.0%. These gains offset declining prices for used cars and trucks.

Food prices rose just 0.1%. Grocery food prices were unchanged amid further reductions in the cost of eggs as well as cheaper meat and fish, which offset a 0.8% increase in fruits and vegetables. But eating out is still more expensive.

In the 12 months to June, the CPI increased by 3.0%. That was the smallest year-on-year increase since March 2021 and follows a 4.0% increase in May.

Economists polled by Reuters predicted that the CPI would rise 0.3% last month and rise 3.1% annually.

Annual inflation is a third of what it was last June, when prices rose 9.1%, the biggest increase since November 1981 and marking a year-on-year peak of CPI rate.

The year-over-year CPI slowed in part because last year’s big increases were dropped from the calculation.

Cooling inflation also means more purchasing power for consumers. Inflation-adjusted weekly earnings for private workers returned 0.5% and rose 0.6% on a year-over-year basis.

President Joe Biden said that inflation and wage data are evidence that his economic policy, which economists call “Bidenomics” is yielding results and promised to “continue to fight for lower costs for families every day.”

However, inflation remains above the Fed’s 2% target, with the labor market still tight. Although employment gains were the smallest in 2-1/2 years in June, the unemployment rate fell near historic lows and wage growth was strong. However, the retreat in inflation has raised cautious hopes that the economy will avoid an expected recession.

It also strengthens the argument against further rate hikes. The US central bank has signaled two rate hikes this year, including one expected this month.

The moderation of price pressures was also recognized in the Fed’s Beige Book report on Wednesday, which found that “contacts in some districts noted a reluctance to raise prices because consumers became more sensitive to prices, while others reported that solid demand allowed companies to maintain margins.”

Wall Street stocks are trading higher. The dollar fell against a basket of currencies. US Treasury prices rose.

KORE INFLATION ADJUSTMENT

Financial markets are pricing in a 25 basis point rate hike at the July 25-26 Fed policy meeting, according to CME’s FedWatch tool.

The central bank skipped a rate hike in June after raising the policy rate by 500 basis points since March 2022.

“We have a lot of data between now and the September meeting,” said Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance in Charlotte, North Carolina. “But evidence is building that the Fed will ‘watch and wait’ after they raise rates this month.”

The improvement in the inflation environment is highlighted by a moderate pace of increase in underlying prices.

Excluding the volatile food and energy categories, the CPI rose 0.2% in June, the smallest gain since August 2021. It was the first time in six months that the so-called core CPI did not post a of monthly profits of at least 0.4%.

Core CPI was boosted by a 0.4% increase in housing costs.

Owners’ equivalent rent (OER), a measure of the amount homeowners pay to rent or get from renting out their property, rose 0.4%. That is the smallest increase in OER since December 2021 and follows a 0.5% increase in May. Prices for hotel and motel rooms decreased by 2.3%.

The cost of motor vehicle insurance jumped 1.7%, while the price of clothing rose 0.3%. But the prices of used cars and trucks fell by 0.5% and the cost of new cars was unchanged. As a result, prices of primary goods fell 0.1% after increasing by 0.6% in May.

Airline tickets were 8.1% cheaper, posting the biggest decline in nearly a year. There is also a reduction in the price of communication services and household appliances and operations.

Health care costs have not changed as have prescription drug prices.

Service prices increased by 0.3%. They rebounded 0.2% excluding rents, reversing last month’s decline.

In the 12 months to June, core CPI rose 4.8%. That was the smallest year-over-year gain since October 2021 and followed a 5.3% increase in May.

Core inflation is expected to continue to decline in the coming months, with the cooling of the labor market and independent measures showing rents on a downward trend. CPI rental measures are likely to delay independent gauges by several months.

The Institute for Supply Management’s measure of prices paid by service businesses for inputs fell in June to the lowest level since March 2020. This measure is seen as a good predictor of personal consumption expenditure inflation. , which is closely monitored by policymakers.

“For the first time in this rate hike campaign, the light of price stability is starting to shine brighter at the end of the tunnel,” said Michael Gregory, deputy chief economist at BMO Capital Markets in Toronto.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci

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