WASHINGTON (AP) — U.S. inflation slowed in June for a third straight month, a sign that the worst price increase in four decades is underway. gradually fades away and could soon lead to interest rate cuts by the Federal Reserve.
Consumer prices fell 0.1% from May to June, after holding steady the previous month, the Labor Department said Thursday, in a better-than-expected report. It was the first monthly decline in headline inflation since May 2020, when the economy was crippled by the pandemic.
Compared with a year earlier, prices rose 3% in June, less than the annual rate of 3.3% recorded in May.
The latest inflation numbers will likely help convince Fed officials that inflation is returning to their 2% target. A brief uptick in inflation earlier this year led officials to lower their expectations for interest rate cuts. Officials have said they would need to see several months of modest price increases to feel confident enough to lower their benchmark rate from its 23-year high.
The June figures will be a continuation of the positive inflation data that the central bank has long been waiting for. If inflation remains low through the summer, most economists expect the Fed to begin cutting its benchmark rate in September.
“This confirms that there is very little chance that inflation will accelerate again and that it is time for the Fed to cut rates,” said Luke Tilley, chief economist at Wilmington Trust, a wealth management firm.
Tilley noted that measures of rental and homeownership costs slowed significantly last month, a long-awaited development. Rental prices typically don’t change much from month to month, he noted, meaning the slower price gains in June are likely to continue.
AP correspondent Shelley Adler reports that consistent numbers show inflation is slowing.
Also Thursday, Mary Daly, a key Fed official, suggested the central bank should cut rates soon. Daly, president of the Fed’s San Francisco branch, said she believed slowing inflation and a weakening jobs market justified an interest rate cut. She did not provide a specific timeline for a rate cut.
“I think it’s likely that some policy adjustments will be necessary,” Daly said on a conference call with reporters.
Even as inflation slows, the costs of food, rent, health care and other necessities remain far higher than they were before the pandemic — a source of public discontent and a potential threat to President Joe Biden’s re-election bid.
Gasoline prices fell for the second straight month in June, dropping 3.8% on average nationally from May. Gasoline prices are now down 2.5% from a year ago. (They have recovered this month and averaged $3.54 nationally on Thursday, according to AAA, up 10 cents from the previous month.)
Food prices edged up 0.1% last month, the first increase in five months, and are only 1.1% higher than a year ago. Food prices are still up, on average, 21% from March 2021, when inflation began to rise, though average American wages have also risen sharply since then.
Excluding volatile food and energy costs, so-called core prices rose by only 0.1% from May to June, less than the 0.2% increase in the previous month. On a year-over-year basis, core prices rose by 3.3% in June, compared with 3.4% in May. Core prices are considered to provide a particularly revealing signal of the likely direction of inflation.
Prices for new and used cars also fell last month. Used car prices, which had soared during the post-pandemic recovery, have fallen 10.1% over the past year.
Renting and homeownership costs, which account for more than a third of the consumer price index, rose at a slower pace last month, up 0.3% from May to June. That was the most moderate increase in nearly three years, and could signal that the long-awaited slowdown in rental price increases has finally arrived. Compared with a year earlier, rents in June still rose 5.1%, a much faster pace than before the pandemic.
Rents are typically among the last to fall, which is why economists were encouraged by the small increase in June. Strong growth in apartment construction over the past two years has brought many new homes online, forcing some landlords to keep rents reasonable to attract tenants. (The government also uses rent data to calculate the costs of homeownership, which rose more slowly last month after years of rapid acceleration.)
Most other major drivers of inflation over the past three years – food prices, used cars, gasoline – have stabilized or declined. Rent price increases remained consistently high through June.
“This is a very good sign that the weakness we’ve been anticipating for the last year and a half is finally starting to play out,” said Alan Detmeister, an economist at UBS Investment Bank. The decline in home prices, he added, “will give Fed officials a sense that the slowdown in inflation is a little more sustainable.”
However, the increase in her rent earlier this year dealt a major blow to Deborah Stettler’s finances. Stettler, a 51-year-old resident of Quincy, Massachusetts, said her rent skyrocketed in January, from $1,500 to $2,000 a month.
A single mother of a 16-year-old son, Stettler also has to contend with sharply rising food prices over the past three years. She buys about half of her family’s food from a local food bank. For the rest, she hunts for sales at grocery stores.
Stettler landed a new job about nine months ago in children’s services after previously working at a branch of the YMCA.
“The rent has gone up, the food has gone up, but the salary hasn’t gone up,” she said. “I still go to the food bank to get food assistance because once you pay all your bills, you don’t have much money left for food.”
Many consumers have cut back on grocery spending, looking for deals and cheaper alternatives to big brands. On Thursday, PepsiCo acknowledged that its sales volume has fallen 4% in North America in the April-June quarter, after raising prices aggressively for two years.
“For some consumers, we need new entry prices and probably new promotional mechanisms that don’t require the consumer to invest so much money in the purchase of a salty snack,” said CEO Ramon Laguarta.
The Fed has kept its key interest rate unchanged for nearly a year after raising it aggressively in 2022 and 2023, making mortgages, auto loans, credit cards and other forms of consumer and business borrowing more expensive.
Inflation is now well below its peak of 9.1% reached in mid-2022. Other measures suggest the economy is healthy, although slowing down:Unemployment is still relatively weakhiring stay fixed And many consumers continue to travel, eat out and spend on entertainment.
Core inflation has been gradually slowing in the second half of 2023, raising hopes that the Fed could cut its benchmark rate as much as six times this year. But rapidly rising costs for auto insurance, apartment rents and other services kept inflation elevated in the first three months of this year, leading Fed officials to lower their forecast for rate cuts in 2024 from three to just one. Wall Street traders expect two rate cuts this year, with the first coming in September.
In testimony Tuesday in CongressFed Chairman Jerome Powell stressed that the labor market had “cooled considerably” and was “not a source of broad-based inflationary pressures.” That was a notable shift from his previous comments, which suggested that rapid wage growth could perpetuate inflation as some companies would likely raise prices to offset rising labor costs.