US inflation at 3% flags rate-setting turning point for Fed

Washington – The US inflation rate slid to a more than two-year low, a major step towards ending the cost-of-living emergency – and possibly the Federal Reserve’s historic monetary tightening too.

It led Senator Elizabeth Warren to call on Fed chairman Jerome Powell

to halt interest rate increases.

“Take yes for an answer, chair Powell, and let’s stop with the rate increases,” Ms Warren, a Massachusetts Democrat, said in an interview on Bloomberg Television. She has famously called Mr Powell a “dangerous man to be running the Fed” and voted against his renomination to the post. 

At 3 per cent in June, consumer price inflation is now just one-third of the level it reached a year ago, which was the highest in four decades. The details for last month were also better than expected, with key measures of underlying inflation coming in below forecasts.

That was after a period of two years or so when the great inflation debate hogged the headlines and loomed large in everything from United States presidential politics to bar-room conversations.

None of this means it is game over in the fight against price pressures – especially for the Fed, which is widely reckoned to be locked in to another interest rate increase later in July. Still, there is now a better-than-even chance that a July 26 hike, which would take the benchmark US rate to 5.5 per cent, could be the last for quite a while.

That was the way markets were betting after Wednesday’s data. Returns on short-term Treasury yields plunged, stocks rose and the US dollar was headed to its lowest in more than a year by one measure – all in anticipation that the Fed might ease up.

‘Coming to an end’

“The new data could give the Fed reason to debate whether any further rate hikes after this month are needed,” wrote Mr Ryan Sweet, chief US economist at Oxford Economics. “This tightening cycle by the Fed is likely coming to an end.”

To be sure, inflation remains far above the Fed’s 2 per cent target and the last phase of getting it down might turn out to be the hardest.

What is more, Americans are still paying far more than they were before the pandemic for a range of goods and services – and that pain is not forecast to end any time soon. President Joe Biden, gearing up for a re-election battle in 2024, will likely find that high prices remain a weapon his Republican rivals can use against him.

For the Fed, there are still causes for concern. For one thing, while inflation is moving in the right direction, mathematics did flatter the latest figures.

Known as “base effects”, the comparison of the consumer price index with June 2022 – when Russia’s invasion of Ukraine had just driven a rapid run-up in energy prices – made the slowdown look particularly dramatic. In fact, annual price growth could very well edge up slightly in the coming months as comparisons with last year become less favourable.

Also, one set of inflation data, even if better than expected, is unlikely to hold great sway with Fed officials. Speaking after the latest figures were released, Richmond Fed president Thomas Barkin reiterated the central bank’s commitment to restoring price stability.

“Inflation is too high. Our target’s 2 per cent,” Mr Barkin said at an event on Wednesday after the report. “If you back off too soon, inflation comes back strong, which then requires the Fed to do even more.”

A large part of what is keeping inflation elevated – as well as powering the rest of the economy – is a resilient labour market. Employers continue to add jobs at a robust pace and wage gains are still strong, enabling Americans to keep spending.

Housing costs contributed to more than 70 per cent of the monthly advance in June, while prices for airline fares and used cars declined. Grocery prices, which have been a key source of financial strain for American families, were unchanged from a month earlier.

A closely watched measure of services prices, which strips out energy and housing, was little changed in June from the prior month. From a year ago, it decelerated to a 4 per cent advance, also the smallest increase since late 2021.

Add it all up, said BMO Capital Markets senior economist Jennifer Lee, and it amounts to some “breathing room” for Fed officials.

Assuming additional inflation reports between now and September show a similar trend, she said, “this definitely gives them the justification to remain on the sidelines”. BLOOMBERG