US Inflation Eases, Opening Door for Fed Rate Cuts

Last updated: July 11, 2024
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Inflation in the U.S. eased in June for the third straight month, suggesting the worst price spike in four decades is waning and could soon prompt the Federal Reserve to cut interest rates.

Consumer prices dipped 0.1% from May to June, marking the first monthly decline since May 2020, according to the Labor Department. Year-over-year, prices rose 3% in June, down from May’s 3.3%.

These figures bolster the Fed’s confidence that inflation is nearing its 2% target.

A slight inflation uptick earlier this year had tempered expectations for rate cuts, but continued low inflation through the summer could lead to a benchmark rate reduction in September.

“This confirms there’s little chance of inflation re-accelerating and that it’s time for some rate cuts from the Fed,” said Luke Tilley, chief economist at Wilmington Trust.

Tilley highlighted a significant cooling in rent and homeownership costs, a welcome change. Rental prices, typically stable month-to-month, saw slower increases in June, a trend expected to continue.

Mary Daly, president of the Fed’s San Francisco branch, echoed this sentiment, suggesting rate cuts might be warranted due to slowing inflation and a cooling job market.

Despite slowing inflation, costs for essentials like food, rent, and healthcare remain high compared to pre-pandemic levels, fueling public discontent and posing a challenge for President Joe Biden’s re-election.

Gas prices fell for the second consecutive month in June, dropping 3.8% nationwide. Grocery prices nudged up 0.1%, the first increase in five months, but overall, food prices are 21% higher than March 2021 levels.

Excluding volatile food and energy costs, core prices climbed just 0.1% from May to June. Year-over-year, core prices rose 3.3% in June, down from May’s 3.4%.

New and used car prices fell in June, with used car prices down 10.1% over the past year.

Rent and homeownership costs, which comprise over a third of the consumer price index, rose 0.3% from May to June, the mildest increase in nearly three years.

Economists view the slowdown in rental price increases as a positive sign. A surge in apartment construction has brought many new units online, forcing landlords to moderate rents to attract tenants.

“This is a really, really good sign that the (price) weakness we’ve been expecting for a year and a half is finally starting to occur,” said Alan Detmeister, economist at UBS Investment Bank.

However, for individuals like Deborah Stettler, a resident of Quincy, Massachusetts, rising costs continue to strain finances. Stettler’s rent jumped from $1,500 to $2,000 in January, and she still struggles with increased food prices.

A single mother working in children’s services, she relies on a local food pantry to make ends meet.

“Rent has gone up, food has gone up, the pay doesn’t go up,” Stettler said. “I’m still going to the food pantry for help because by the time you pay all your bills, you don’t really have a lot of money left for food.”

Consumers have adjusted by cutting back on grocery spending and seeking deals. PepsiCo noted a 4% drop in sales volume in North America for the April-June quarter after raising prices for two years.

The Fed has maintained its key interest rate for nearly a year after aggressive hikes in 2022 and 2023, which made mortgages, auto loans, and other borrowing costlier. Inflation is now far below its mid-2022 peak of 9.1%.

In testimony to Congress, Fed Chair Jerome Powell observed that the job market has “cooled considerably” and is no longer a broad inflationary pressure, signaling a shift from past concerns about rapid wage growth driving up prices.

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