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US Economy Moves Into A Disinflationary Mode, With Small Consumer Price Increases

US Economy Moves Into A Disinflationary Mode, With Small Consumer Price Increases
The United States Federal Reserve is likely not going to stop hiking interest rates this month despite the fact that consumer prices in the United States increased modestly in June and marked their smallest annual increase in more than two years as inflation continued to decline.
In addition, the Labour Department's report on Wednesday showed that consumer prices had increased only marginally in August 2021. Investors believed the U.S. central bank's monetary policy tightening cycle, which has been at its quickest pace since the 1980s, was nearing its end as a result of the significant slowing in underlying inflation, which prompted a rally on the stock and bond markets.
"Inflation isn't dead, but the extraordinary pandemic push on prices from shortages and shift 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.
After nudging up 0.1% in May, the CPI increased by 0.2% last month. Seventy percent of the increase in the CPI last month was attributed to housing, which includes rent. Along with rises in gasoline costs, there were also hikes in auto insurance. The price drop for secondhand vehicles and trucks was partially compensated by these benefits.
Prices for food increased by barely 0.1%. Prices for groceries remained stable due to cheaper meat and fish and additional drops in the price of eggs, which offset a 0.8% increase in the price of fruits and vegetables. But eating out was still more expensive.
The CPI rose 3.0% in the year that ended in June. Following a 4.0% increase in May, that was the weakest year-over-year gain since March 2021.
According to Reuters' poll of economists, the CPI was expected to have risen 0.3% last month and 3.1% annually.
The rate of annual inflation is now only one-third of what it was in June of last year, when prices soared by 9.1%, the highest increase since November 1981 and a high point for the CPI rate year over year.
The huge increases from last year are no longer included in the calculation, which is causing the year-over-year CPI to decline.
Consumers' purchasing power increased when inflation slowed. Private sector weekly earnings after inflation increased 0.5% and increased 0.6% on an annualised basis.
President Joe Biden stated that the figures on inflation and salaries showed that his economic strategy, known as "Bidenomics" by economists, was having an impact on the economy. He also vowed to "continue to fight for lower costs for families every day."
Despite this, the labour market is still tight and inflation is still significantly higher than the Fed's 2% target. Even while June saw the smallest employment increase in 2-and-a-half years, the unemployment rate dropped close to historically low levels, and wage growth was robust. The economy may yet be able to avoid the much-anticipated recession, though, as a result of declining inflation.
Additionally, it strengthened the case against further rate increases. Two rate increases, including the one anticipated this month, have been previewed by the US central bank this year.
In the Fed's Beige Book report on Wednesday, which stated that "contacts in some districts noted reluctance to raise prices because consumers had grown more sensitive to prices, while others reported that solid demand allowed firms to maintain prices," the slowdown in price pressures was also acknowledged.
The employment market remains tight despite this, and inflation is still far higher than the Fed's target of 2%. The unemployment rate decreased to levels that are nearly as low as they have ever been, and pay growth remained strong even though June marked the weakest job rise in two and a half years. However, due to lowering inflation, the economy might still be able to avoid the much-anticipated recession.
It also made the case against further rate increases stronger. The US central bank has forecast two rate rises this year, one of which is expected this month.
"We have a lot more data between now and September's meeting," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina. "But the evidence is building that the Fed will 'watch and wait' after they raise rates this month."
A slowing of the rate of increase in underlying prices underlined the better inflation environment.
The CPI rose 0.2% in June, the smallest growth since August 2021, when volatile food and energy prices were excluded. The so-called core CPI did not record monthly growth of at least 0.4% for the first time in six months.
A 0.4% increase in housing expenses helped to increase the core CPI.
Owners' equivalent rent, or OER, increased by 0.4%. OER is a measure of what homeowners would pay in rent or make from renting out their property. That hike, which came after a 0.5% increase in May, was the smallest increase in the OER since December 2021. Hotel and motel room costs decreased by 2.3%.
While clothes costs increased 0.3%, the price of auto insurance increased 1.7%. However, the cost of used automobiles and trucks decreased by 0.5%, while the price of new cars remained the same. Core goods prices thus decreased by 0.1% after rising by 0.6% in May.
The largest decrease in the price of airline tickets in over a year was 8.1%. Additionally, the cost of communication services, home goods, and operations all decreased.
Both the price of prescription drugs and the cost of healthcare remained constant.
Services cost increased by 0.3%. Absent rent, they increased 0.2%, reversing the previous month's decrease.
The core CPI increased by 4.8% over the past year, as of June. After a 5.3% increase in May, that was the weakest year-over-year improvement since October 2021.
The labour market is projected to cool off in the next months, and independent indicators imply that rents are trending downward. The CPI's rent measurements frequently trail independent indicators by several months.
The gauge of input prices paid by service businesses by the Institute for Supply Management fell in June to its lowest point since March 2020. Policymakers frequently monitor this index as a reliable indicator of inflation in personal consumption expenditures.
"For the first time in this rate-hike campaign, the light of price stability is starting to shine more brightly at the end of the tunnel," said Michael Gregory, deputy chief economist at BMO Capital Markets in Toronto.

Christopher J. Mitchell

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