Average U.S. inflation dipped to 3% in June, down from May’s annual reading of 3.3% and reflecting a month-over-month decline of .1%, the first monthly drop in over four years, according to a U.S. Labor Department report Thursday.
The new data could help fuel an interest rate reduction move by the Federal Reserve in September, loosening up the monetary body’s long-running pause on its benchmark federal funds rate that’s been stuck in the 5.25% to 5.5% range since July 2023, the highest level in decades.
According to Thursday’s Consumer Price Index Summary for June, a steep decline in gasoline prices, which fell 3.8% over the previous month and are down 2.5% in the last 12 months, helped offset rises in the cost of shelter, food and other consumer expenses.
The core CPI measure, which strips out volatile food and energy costs, came in at 3.3% in June, the smallest 12-month increase in that index since April 2021, according to the Labor Department.
Home ownership and rental costs, which account for over one-third of the index, moved up .2% from May to June and are 5.2% higher than this time last year. Grocery prices moved up .1% in the last month, after remaining flat in May, and were 1.1% higher than in June 2023. Pricing on food away from home saw a bigger monthly gain, .4% higher in June and was up 4.1% over the past year.
Mountain West states, which include Utah, saw a substantially lower annual inflation figure, according to Thursday’s report, with average prices on goods and services up 2.3% in June over the past 12 months.
Will new inflation data lead to a Fed rate cut?
The new data should help push the Fed’s Open Market Committee closer to a rate reduction decision after the panel signaled at the conclusion of its June meeting that a September rate cut was a possibility.
Earlier this week, Fed Chairman Jerome Powell made separate appearances at U.S. Senate and House hearings to deliver his regularly scheduled semiannual report to Congress.
Powell declined to offer any dates for a possible rate cut but highlighted some economic trends that were setting the table for a near-future reduction.
The Fed boss noted the U.S. jobs market was finally settling down after two years of demand far outpacing available workers and that while unemployment has inched up to 4.1% from the 3.7% rate that closed out 2023, the metric was still historically low and job growth so far this year is averaging over 200,000 new positions per month.
Powell also underscored that Fed officials are now navigating a more balanced challenge when it comes to adjusting monetary policy to successfully achieve the body’s two-pronged mandate of maintaining price stability and maximum employment.
“We’re well aware that we now face two-sided risks and have for some time,” Powell said. “The labor market appears to be fully back in balance. If we loosen policy too late or too little we could hurt economic activity. If we loosen policy too much or too soon then we could undermine the progress on inflation.”
At its June meeting, the Fed’s Open Market Committee voted to keep rates at the current range of 5.25% to 5.5%, where they’ve stood since July 2023 after a series of 11 straight increases were levied by the monetary body, a strategy aiming to cool off a too-hot U.S. economy.
While a series of steady U.S. inflation downticks over the second half of 2023 had spurred the Fed to signal late last year it could assess multiple federal lending rate cuts in 2024, inflation headed back up early this year and forced the monetary body to recompute.
At the conclusion of its June meeting, the Fed committee was projecting five interest rate cuts by the end of 2025, with a likely .25% reduction this year and four additional reductions next year, ending 2025 with the body’s benchmark rate at 4.1%.
But Powell said no cuts will be made until policymakers have greater confidence in where the U.S. economy is headed and that will be a decision based on further data. Another path to a rate reduction could come if any unexpected turbulence should arise in the jobs sector, however.
Calling for a rate cut
On Thursday, Luke Tilley, chief economist at Wilmington Trust, a wealth management firm, told The Associated Press that the new CPI report data should compel the Fed to move forward with a rate cut.
“This confirms that there is very little chance of inflation re-accelerating and that it’s time for some rate cuts from the Fed,” Tilley said.
Interest rate adjustments are the Fed’s primary weapon in an ongoing battle against the elevated prices of consumer goods and services. The rate increases raise the cost of debt for businesses and consumers, a move that aims to reduce the amount of spending and overall economic activity. That shift in dynamics typically leads to lower inflation rates.