Inflation in the United States rose at its slowest pace in more than two years last month, a sign that a series of interest rates have punctured soaring price rises. The annual inflation rate slowed to 3.1% in June, down from 4% in May, according to the latest data from the Labor Department. Inflation in so-called core prices — a measure that excludes volatile food and energy costs — fell to 2.7%, the lowest since April 2022.
The decline in headline inflation will likely relieve the Federal Reserve, which began hiking interest rates in early 2022 to bring the underlying pace of price increases closer to its 2% target. But the picture remains cloudy, primarily because higher borrowing costs are hitting household budgets and dampening consumer spending.
“At this point, it’s still too soon to declare mission accomplished on taming inflation,” said Oren Klatchkin, a U.S. economist at Oxford Economics. He said the Fed couldn’t “shut the engine down and pull over” until it sees a clearer picture of whether sluggish economic growth will push consumer prices back towards its 2% target.
A significant factor in lowering inflation is falling oil prices, easing consumer pressure to buy gasoline and other fuels. Food prices have also eased after a series of jumps earlier this year. But some signs underlying price pressures remain stubbornly high, including elevated freight costs and bottlenecks in supply chains that are putting upward pressure on the cost of many goods.
The improving inflation environment was reinforced by other data on Friday showing that labor costs posted their smallest increase in two years in the second quarter as wage growth cooled. This month’s data mirrored reports showing the economy is gradually shifting into disinflation mode, with a strong job market and cooling inflation combining to boost household purchasing power.
Wage growth has slowed, but the broader measure of inflation-adjusted wages remained solidly above a year ago. That is a critical factor in boosting Americans’ ability to spend and reviving the economy after a long period of weak demand and sluggish economic growth following the end of the global financial crisis in 2009.
Inflation may be moderating, but the Fed must see clear signs that it has succeeded in taming inflation before considering bringing its rate-hike cycle to an end. The Fed’s next policy meeting is scheduled for September 19-20. At that meeting, the governing committee is expected to raise its benchmark short-term interest rate by another half percentage point. The Fed’s current tightening cycle began in March. If the current trend continues into next year, the Fed’s rate hikes would be the longest in a generation. The economy is still recovering from the deep contraction that followed the financial crisis, but the current recovery has been relatively resilient and has accelerated this year.
