Inflation data released on Wednesday showed a pronounced cooling and offered some of the most hopeful news since the Federal Reserve began trying to tame rapid price increases 16 months ago.
The Consumer Price Index climbed 3 percent in the year through June, less than the 4 percent increase in the year through May and just a third of its roughly 9 percent peak last summer.
That overall metric catches big declines in gas prices and a few other products that could prove ephemeral, which is why policymakers closely watch a different measure: the change in prices after stripping out food and fuel costs. That measure, known as the core index, offered news that was even better than what economists had expected, sending stocks higher as investors bet that the news would allow the Fed to raise interest rates by less than they otherwise might have.
The core index climbed 4.8 percent compared with the previous year, down from 5.3 percent in the year through May. Economists had forecast a 5 percent increase. And on a monthly basis, the core index climbed at the slowest pace since August 2021.
“This is very promising news,” said Laura Rosner-Warburton, senior economist and founding partner at MacroPolicy Perspectives. “The pieces of the puzzle are starting to come together. But it’s just one report, and the Fed has been burned by inflation before.”
Slower inflation is unquestionably good news, because it allows consumer paychecks to stretch further and inflicts less pain at the gas pump and in the grocery aisle. But Federal Reserve officials are still trying to assess whether the cool down is likely to be quick and complete. They do not want to allow price increases to linger at slightly elevated levels for too long, because if they do, consumers and businesses could adjust their behavior in ways that makes more rapid inflation a permanent feature of the economy.
Given that, they may be cautious in interpreting the news. Officials have signaled in recent weeks that they are likely to raise interest rates at their July 25-26 meeting.
Ms. Rosner-Warburton said she thought a July move was still likely, but that the fresh inflation data could lay the groundwork for “a more extended pause” after. She added that a cooling in car prices and slower rent increases should keep the moderation in inflation underway, and she forecast that the Fed would not raise interest rates again this year following the July change.
The June inflation slowdown came as a few key products and services posted steep price declines. Airfares fell 8.1 percent compared with the previous month, and used cars and trucks were down 0.5 percent. New vehicle prices were flat compared with May.
Not all of those changes will necessarily last: Airline tickets, for instance, are not expected to continue to decline as sharply as they did in this report. But for the Fed, there were other encouraging signs that the cool-down is broad enough to prove sustainable.
For one thing, the cost of housing as measured by the Consumer Price Index — which relies on rent prices — is coming down sharply. That is expected to continue in coming months. An index tracking the rent of primary residences slowed to a 0.46 percent change in June, the weakest increase since March 2022.
Car prices are also cooling. After years in which semiconductor shortages and other parts problems limited supply, making it hard to meet booming demand, discounting is making a comeback on car dealer lots. Inventories are rebounding, and consumers have a less voracious appetite for new cars in particular.
“It’s different from the past couple of years, and even different from the fall,” said Beth Weaver, who runs a Buick GMC car dealership in Erie, Pa. “Interest rates have certainly weighed on demand.”
And more broadly, price increases for a basket of services excluding energy, food and housing costs — a metric that the Fed watches very closely — continued to slow in June.
But in spite of all of the recent progress, inflation remains above the rate of increase that was normal before the 2020 pandemic. And the economy still retains momentum, with strong job and wage growth, which could give companies the wherewithal to keep raising prices. That is why Fed officials are hesitant to say they have won the battle against inflation.
“It would be a mistake” to “declare victory” too early, Loretta Mester, the president of the Federal Reserve Bank of Cleveland, said on a call with reporters this week.
The Fed officially targets 2 percent inflation on average over time, though it defines that goal using a separate inflation measure, the Personal Consumption Expenditures index. That gauge is also slowing notably, and its June reading is scheduled for release on July 28.
Even if central bankers are likely to interpret the slowdown cautiously — cognizant that price increases have slowed and then accelerated again before — many commentators welcomed the fresh data point as the latest sign that the economy may be able to slow gently.
Officials at the Fed have been trying to engineer a “soft landing” in which inflation slows gradually and without requiring a big jump in the unemployment rate. Interest rates increases work partly by slowing the job market and cooling wage increases, so the Fed’s fight against inflation and the strength of the labor market are closely tied.
“The sustained decline in inflation is encouraging news for the U.S. labor market outlook,” Julia Pollak, chief economist at ZipRecruiter, wrote in response to the fresh release. “It increases the likelihood that the Fed will be able to pause rate hikes after one final July increase, and gradually lower rates through 2024.”
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Inflation is slowing across a range of products and services, a breakdown of the data shows. While falling gas prices have been a particularly big drag on overall inflation, we’re also seeing a nice (and long-awaited) decline in service prices excluding energy. That measure has added less and less to overall price increases for the past five months.
President Biden, whose re-election prospects could hinge on whether inflation moderates without the economy tipping into a recession, quickly took credit for the latest data showing a June slowdown in price increases.
“Good jobs and lower costs: That’s Bidenomics in action,” Mr. Biden said in a statement on Wednesday.
The White House has branded its economic agenda as “Bidenomics” in recent weeks and the president has been making the case that his policies have kept the economy on a steady path and maintained a healthy labor market.
While controlling inflation is the job of the Federal Reserve, it is Mr. Biden whose political fate rests on whether the central bank can cool the economy enough to achieve what’s known as a “soft landing” by wrestling price increases under control without causing a recession.
“Today’s report brings new and encouraging evidence that inflation is falling while our economy remains strong,” Mr. Biden said in the statement. “Our progress creating jobs while lowering costs for families is no accident, and I will continue to fight for lower costs for families every day.”
While the latest data showed that Mr. Biden may be able to get that gentle slowdown, the economy still faces headwinds. The Fed, which has raised interest rates above 5 percent to try and cool the economy, is expected to lift them again later this month.
Treasury Secretary Janet L. Yellen said in an interview with CBS this week that a recession is “not completely off the table.” Still, she expressed optimism that while the labor market would likely soften, the United States would not experience such a downturn.
“It’s my hope that, and belief, that there is a path to bring inflation down in the context of a healthy labor market and the data that I’ve seen suggests we’re on that path,” Ms. Yellen said.
Republicans argued on Wednesday that inflation remained too high and that real wages were lower than when Mr. Biden took office.
“It will take American families a long time to recover from ‘Bidenomics,’” said Tommy Pigott, rapid response director for the Republican National Committee. “The main way to make sure they do is to make Biden a one-term president.”
Stocks continued their ascent after markets opened. The S&P 500 rose 0.8 percent while the tech-heavy Nasdaq Composite jumped 1.2 percent. The Russell 2000 climbed 1.5 percent, reflecting optimism among investors in smaller companies that are more exposed to the domestic economy.
President Biden said in a statement that the inflation report represents “Bidenomics in action” and that it is “encouraging evidence that inflation is falling while our economy remains strong.”
Rent increases continued to slow last month, good news both for tenants and for policymakers at the Federal Reserve.
Rents rose 0.5 percent on average in June, and were up 8.3 percent from a year earlier. That was down from a peak of 8.8 percent growth last spring, and the slowest rate of increase since late last year.
Housing costs, as measured by the Labor Department, are still rising faster than consumer prices overall. But more relief may be in sight: Rent indexes based on private-sector data, which tend to adjust more quickly than the government’s official measures, have cooled significantly in recent months. In some cities, rents for newly listed housing units have been falling outright.
The slowdown will be welcome news for the Fed because rent — along with other housing costs, which are closely related — is by far the largest component of the Consumer Price Index.
Still, rents have risen nearly 18 percent since February 2020, before the pandemic hit the U.S. economy, and are up by far more than that in some cities. And unlike gas prices or airfares, rents rarely fall, meaning that although tenants may no longer be facing double-digit rent increases, they are unlikely to see their monthly housing costs go down anytime soon.
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Airfares took another dive last month, following a wild ride over the past year, reflecting volatile energy prices and swings in demand.
Prices have dropped 18.9 percent in the year through June, or 8.1 percent between May and June, even as passenger traffic has reached record highs. The numbers are somewhat deceptive, however, because of a combination of circumstances.
Ticket prices spiked last summer as Americans planned the vacations they were denied during the pandemic. At the same time, airlines struggled to provide seats, having mothballed planes while nobody was flying and having let go of staff in a wave of retirements by pilots and other personnel. Then, jet fuel prices shot up, and air carriers passed the extra costs on to customers.
Those factors have eased markedly in recent months. Airlines have been hiring aggressively for all positions and adding flights, bringing capacity back up to prepandemic levels. And as energy prices have moderated, ticket prices have receded as well.
Although this summer has seen its share of turmoil at airports, much of that has been because of weather; airlines have also blamed a shortage of air traffic controllers.
Still, there are important wrinkles to how airfares are measured, which makes analysis difficult.
It has been difficult to adjust for seasonal factors in airline travel, given extreme disruption during the pandemic. Also, the Labor Department’s price index is overwhelmingly composed of domestic flights — international routes have seen the largest price increases, as even more travelers flock to overseas destinations.
Even after the better-than-expected inflation data, investors expect the Fed to follow through and increase interest rates by another quarter-point later this month. The numbers in the report are a welcome sign that inflation is slowing, but it remains higher than the central bank would like.
However, investors have dialed back their expectations of another rate increase later this year, and increased the likelihood of a cut to interest rates in the first half of 2024. That’s helping lift stock prices and weaken the dollar.
“All things considered this is very good news on the inflation front,” said Kathy Jones, chief fixed income strategist at Schwab Center for Financial Research. It’s unlikely to be enough to stop the Fed from increasing interest rates later this month, she said, though markets have dialed back their expectation of a second rate increase later this year.
“It’s a really good number overall. You can’t find a hole in it. We might not get a repeat of this every month but it’s moving in the right direction, whatever you look at,” Jones said.
The dollar sank 0.6 percent following the fresh data, reaching its lowest point since April, according to an index that gauges its value versus the currencies of the country’s major trading partners. It’s another sign that investors expect interest rates to plateau, with the dollar rising last year alongside repeated rate increases.
The rapid rise in food prices that has bedeviled consumers for more than a year continued to moderate in June, with costs for products like eggs, meats and milk falling.
Overall, the cost of food climbed 0.1 percent in June from the prior month, a slight slowdown after rising 0.2 percent in May and remaining flat the two months before.
Grocery prices remained flat in June, down from 0.1 percent in May. The cost of eating at restaurants continued to rise, albeit more slowly, picking up 0.4 percent over the month. That was down from 0.5 percent in May.
Food inflation has started to cool in recent months, bringing relief to consumers that have struggled to afford their grocery bills. Still, although prices are not rising as quickly as they were, the cost of food remains stubbornly high. In the year through June, food prices rose 5.7 percent, down from 6.7 percent in the year through May.
Prices for fruits and vegetables increased 0.8 percent in June, cooling from a 1.3 percent increase in May. A gauge of costs for meats, poultry, fish and eggs decreased 0.4 percent in June.
Egg prices continued to fall after an outbreak of bird flu and other factors led to a spike in prices earlier this year. In June, egg prices fell 7.3 percent from the prior month, slightly down from a big 13.8 percent decline in May.
Various factors have contributed to the moderation in food price pressures. Supply shocks have abated and the costs for ingredients and other raw materials have fallen in recent months. Labor costs have also eased and lower fuel prices have helped bring down transportation costs.
David Ortega, a food economist at Michigan State University, said he expected the recent slowdown in food inflation to continue in the next few months. Shoppers are starting to notice that certain products have become cheaper or are not swelling in price as much as they were in previous months, he said.
Mr. Ortega noted that price increases for packaged products and processed foods have been slower to come down compared with many fresh food items. Packaged products, such as condiments and canned goods, have more complex supply chains, meaning that the cost of ingredients represents a smaller share of the overall prices that consumers pay.
Prices for processed fruits and vegetables have risen 8.8 percent over the past year, while prices for fresh fruits and vegetables have increased 1.1 percent.
Although prices of groceries are starting to return to a more normal level, that might not provide much comfort to consumers who have been frustrated with the abnormally large jump in prices compared to a year ago.
“People shouldn’t expect that prices will be back to what they were before Covid,” Mr. Ortega said. “But we have seen a significant departure from normal with regard to food price increases.”
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Today's report is more evidence that inflation is cooling, which is good news for President Biden, who touted slowing price increases last week as a sign that “Bidenomics” was successfully lowering costs for Americans while maintaining steady economic growth.
Stocks shot higher immediately after the numbers were released, as investors welcomed data that showed inflation slowing even faster than they had forecast. The S&P 500 notched a gain of 0.7 percent in premarket trading.
U.S. government bond yields fell sharply as investors dialed back expectations for the length of time the Fed would keep interest rates elevated. The two-year Treasury yield, which is sensitive to changes in interest-rate expectations, fell 0.16 percentage points to 4.73 percent, its biggest move lower in more than two months.
Stock futures rose Wednesday morning amid expectations that the inflation report would show price increases cooling. The S&P 500 and Nasdaq Composite indices both gained about 0.3 percent. The Russell 2000, which represents smaller companies more exposed to the ups and downs of the economy, rose nearly 0.6 percent.
Beth Weaver, who runs a Buick GMC car dealership in Erie, Pa., is witnessing something this summer that has not happened much since 2020: Demand is weak enough that she and her competitors are deeply discounting some cars to move them off their lots.
Cars have been in hot demand and short supply for years, thanks in part to pandemic-era disruptions to production. But inventory has been gradually recovering, and people are becoming less frantic to purchase new vehicles. That means that instead of shooting relentlessly higher, price increases on cars are finally moderating.
“It’s different from the past couple of years, and even different from the fall,” Ms. Weaver said. “Interest rates have certainly weighed on demand.”
Automobiles were a major driver of inflation when it started to take off in 2021, and prices have remained volatile ever since: After slowing last year, used car prices popped at a wholesale level early in 2023. But they are coming down again, which could help to meaningfully weigh on inflation.
“My view of automotive right now — and what we’re expecting over the next few months — is normalizing,” said Jonathan Smoke, chief economist at Cox Automotive. “We’re rapidly approaching a point at which demand and supply are coming more into balance.”
Omair Sharif, founder of Inflation Insights, expects used cars to post a notable price decline in June — helping to pull down overall inflation. His expectation is that new car prices will be flat in June, though he is not ruling out an outright decline.
Mr. Sharif thinks the new car price slowdown could last, though it may become less dramatic later this year. But used cars remain something of a wild card, because there are still relatively few to go around. Companies did not make that many cars in 2021 and 2022 amid production snarls arising from shortages of semiconductors and other parts, which means that there are fewer pre-owned vehicles available now.
“We are still very short on supply and haven’t seen much improvement,” Mr. Sharif said. “So, with prices expected to fall materially over the next three to four months, we might see the lower prices pull in consumers again, similar to what happened at the start of 2023.”
Ms. Weaver said that she’s already seeing some divergence between the two markets. Used car shoppers are still trying to buy, often out of desperation: A company needs a bigger fleet, or a person is looking to replace a vehicle that has failed inspection. New car buyers are more in wait-and-see mode.
“The fact that there’s inventory is creating less of a sense of urgency,” she said, explaining that last year she’d have one car of a certain model on her lot and it would sell immediately. This year, she might have six, and little interest.
Some investors believe that a recession warning that has been flashing on Wall Street for the past several months is wrong and that the Federal Reserve will be able to tame inflation and still escape a deep downturn.
The signal — called the yield curve — began suggesting last year that the economy was headed for a slump. But since then the stock market has rallied and the economy has remained resilient.
The yield curve describes the line that is created on a chart when the rates on government bonds of different maturities are lined up in chronological order. Typically, investors expect to be paid more interest for lending for longer periods of time, creating an upward sloping curve. For the past year, the curve has inverted, with shorter-term yields rising higher than yields on bonds with longer maturities.
The inversion suggests that investors expect interest rates over time will fall from their current high level. And that usually only happens when the economy needs propping up and the Fed decides to help by lowering interest rates.
However, the U.S. economy, while slowing, remains on firm footing and investors are primed for good news from Tuesday’s inflation report, which is expected to show the Fed’s attempts to slow the pace of rising prices are taking hold.
“This time around I am inclined to deemphasize the yield curve,” said Subadra Rajappa, an interest rate analyst at Société Générale.
One common measure of the yield curve is the most inverted it has been in 40 years, with the yield on two-year debt roughly one percentage point higher than the yield on 10-year notes.
The last time the yield curve was so inverted was in the early 1980s, when the Fed last battled runaway inflation, resulting in a recession.
The precise time between inversion and recession is difficult to predict from the yield curve, and has varied considerably in the past. Still, for five decades it has been a fairly reliable indicator.
But history might not repeat itself this time because the current conditions are idiosyncratic: The economy is recovering from a pandemic, unemployment is low and companies and consumers are in mostly good shape.
“The situation we are in is very different from normal,” said Bryce Doty, a senior portfolio manager at Sit Investment Associates. “I don’t think it’s predicting a recession. It’s relief that inflation is coming down.”