Inflation cools again in June in another positive sign for U.S. economy

 


Inflation is cooling again after a surprising surge earlier in the year. And that means the Federal Reserve could cut interest rates by September.

The first decline in the consumer price index since the pandemic in 2020 could even speed up the Fed's decision.

The Fed is aiming to lower the annual rate of U.S. inflation to 2.0%, using its preferred PCE price barometer.

The PCE index was running at a 2.6% yearly clip as of May, but Fed chief Jerome Powell said the central bank won’t wait until it reaches its target before reducing borrowing costs.


The Fed still pays attention to the CPI since it moves in the same direction over time, but the central bank views it as less accurate.

The CPI has risen at a 3.0% clip in the past 12 months. Still, the 3% yearly reading was the lowest since April 2021.

Powell on Wednesday recommitted the Fed to making interest-rate decisions based on the lesser known PCE index.

“We define our goal in terms of that because we believe it is the better measure of the cost of inflation that the public faces,” he told members of Congress.

The unexpected decline in inflation in June might be too good to be true, but slower increases in the cost of rent and shelter could be a big deal.

Over the past few years, the cost of shelter has been one of been the biggest source of U.S. inflation. It's the largest expense for most families and accounts for about 36% of the entire consumer price index.

Economists and Federal Reserve officials have been banking on a slowdown in shelter costs because rents are no longer rising very rapidly. Yet because of the peculiar way rents are calculated in the CPI, big changes in the catchall shelter category can take up to a year to show up.

That appears to be what is happening.


The cost of rent rose just 0.3% in June to mark the smallest increase in almost three years.

The increase in rents in the past 12 months, what's more, slowed to 5.1% in June from 5.3% in the prior month and touched the lowest level since April 2022.

Rents are expected to slow even further, but just how much is unclear. Before the pandemic, they were rising about 3.5% to 3.9% a year.

The cost of "imputed" housing, meanwhile, rose a scant 0.3% in June. That's the smallest increase since July 2021.

This category, known to economists as OER, is a indirect proxy for how much the cost of housing is rising.

"Slower growth in shelter prices finally seems to be making its way into the official data," said Elizabeth Renter, senior economist at NerdWallet.

"Because rent inflation accounts for about 36% of the total CPI, slowing growth here stands to substantially impact the overall inflation figures."

The uptick in inflation in early 2024 stems in large part from shelter, the single biggest category of the CPI. It accounts for one-third of the entire index.

The Social Security cost-of-living adjustment for 2025 could be lower than the 3.2% increase this year as inflation moderates.

COLA could be 2.7% in 2025, according to Mary Johnson, an independent Social Security and Medicare analyst and former analyst with the Senior Citizens League. That new forecast compares to her forecast in June that called for a 3% increase.

The official announcement for 2025 COLA comes out in October. The average COLA over the last 20 years has been about 2.6%, according to the Senior Citizens League.

COLA is not a raise, but an adjustment to help keep pace with inflation.

The cost of consumer goods and services fell in June for the first time since the pandemic in 2020.

The surprise decline in inflation in June as shown by the consumer price index largely stemmed from lower prices for gasoline and used cars and trucks.

Gas prices dropped 3.8% in June, the government said. And the cost of used cars and trucks fell 1.5%.

Another good omen was the smallest increase in the cost of shelter since 2021. Rent and housing prices have been the biggest driver of inflation in the past year.

Prices also fell for new cars and trucks and airline fares.

Prices rose slightly in June for groceries and they rose more sharply at restaurants and other food preparers outside the home.

After a brief respite, the cost of auto insurance rose again.

The cost of consumer goods and services fell in June for the first time since the pandemic in 2020, affirming a recent slowdown in inflation that could impel the Federal Reserve to cut high U.S. interest rates in the next few months.

The consumer price index fell 0.1% last month after no change in May, the government said Thursday. That's the first drop since May 2020 at the height of the pandemic when the economy was mostly shut down.

The 12-month rate of inflation also slowed to 3% from 3.3% and matched the lowest level since April 2021.

The more closely followed core CPI that strips out food and energy rose just 0.1% for the second month in row. It came in under Wall Street's 0.2% forecast.

Those are the slowest back-to-back readings in the core CPI in more than three years.

The yearly rate of core inflation slowed to 3.3% from 3.4%.

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