US inflation cools for third straight month at 0.1% in June; Wall Street lifts Fed rate cut bets for September

US inflation cooled for the third straight month and rose less than expected in June 2024, giving a major boost to Wall Street bets for definite interest rate cuts by the US Federal Reserve. The favourable inflation print of the world's largest economy resulted from a long-awaited slowdown in housing prices, signalling that the worst price rise in nearly four decades is gradually fading away.

The US consumer price index (CPI) — which excludes food and energy costs — slid 0.1 per cent in June after being unchanged in May, according to data released by the Labor Department's Bureau of Labor Statistics on July 11. This was the smallest advance in three years -- the weakest monthly reading since May 2020, when the US economy was paralyzed by the COVID-19 pandemic.

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Measured from one year earlier, consumer prices were up three per cent in June---the lowest reading in a year, and cooler than the 3.3 per cent annual rate in May. Broadly, economists see the core gauge as a better indicator of underlying inflation than the overall CPI. Over the past three months, US inflation rose at just a one per cent annual rate, signaling the downward trend of price rise.
 

US inflation: Key metrics

Most other major drivers of inflation over the past three years — groceries, used cars, gas — have either leveled off or declined. Shelter prices, which is the largest category within services, climbed 0.2 per cent, the smallest gain since August 2021. The owners’ equivalent rent in US — a subset of shelter, which, at over one-third, is the biggest individual component of the CPI — climbed 0.3 per cent, also the slowest in three years, according to US government data.

Rental price increases had remained persistently high until June and are typically among the last inflationary dominoes to drop, which is why economists are encouraged by the smaller rise in June. A jump in apartment construction in the past two years has brought many new units online, forcing some landlords to keep rents in check to attract renters.

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Economists noted that measures of rent and homeownership costs cooled significantly, and termed it as ‘a long-awaited developmen’. These prices typically do not change much from month to month, which means that the slower price increases in June will probably continue, as per analysts.

The costs of other services like airfares, hotel stays and inpatient hospital care declined from a month earlier. The new and used vehicle prices led broader decreases in the core goods basket. Used car prices, which had soared during the recovery from the pandemic, have dropped 10.1 per cent in the past year. The cost of household furnishings has fallen nearly every month for the past year.

The prices of new vehicles declined for a sixth month, and some apparel categories dropped as well. A sustained decline in the price of goods over most of the past year has largely been providing some relief to consumers. 

In June, gas prices plunged for a second straight month, tumbling 3.8 per cent on average nationwide from May. Gas prices are down 2.5 per cent from a year ago. Grocery prices ticked up by a slight 0.1 per cent last month, the first increase in five months, and are just 1.1 per cent higher than a year ago. Food prices are still up, on average, 21 per cent from March 2021, when inflation started to surge, although the average wages have also risen sharply since then.
 

US inflation bolsters near-positive US Fed rate cut bets

Jerome Powell-led Federal Open Market Committee (FOMC) has kept its key interest rate unchanged at a record 23 year high-level in the 5.25 per cent to 5.5 per cent range for nearly a year. This, after having aggressively raised it in 2022 and 2023, leading to costlier mortgages, auto loans, credit cards and other forms of consumer and business borrowing.

The US economy has been on a bumpy path to combat stubborn inflation, which soared to a blistering 9.1 per cent in mid-2022. This prompted the US central bank to rapidly hike interest rates for easing demand and bring down inflation.

In the second half of 2023, core inflation cooled steadily, raising expectations that the US Fed would cut its key rate up to six times this year. However, fast-rising costs for auto insurance, apartment rents and other services kept inflation elevated in the first three months of this year, leading US Fed to downgrade their forecasts for rate cuts in 2024 from three to just one.

The Fed policymakers said they would need to see several months of mild price increases to feel confident enough enough to cut the benchmark interest rates. Now, US inflation is far below its four-decade high peak. The latest inflation reading adds to a series of encouraging data which will likely help convince Fed’s policymakers that inflation is returning to their two per cent target.

In two days of testimony before Congress this week, Fed chairman Powell appeared to edge the door open to a September rate cut, saying that the US economy was "no longer overheated" and that "more good data" on inflation would lay the groundwork to reduce the benchmark policy interest rate.

The jobs market is another segment that Fed policymakers are monitoring. Powell told lawmakers that the job market has ‘cooled considerably’ and is 'not a source of broad inflationary pressures.' This marked a notable shift from his past comments, which suggested that rapid wage growth could perpetuate inflation as firms may raise their prices to offset their higher labor costs.

Powell, in testimony before lawmakers, avoided signaling the timing of likely rate cuts and insisted policy moves would be guided by incoming data. Most Wall Street economists believe that the June reading will go a long way toward giving Fed policymakrres the confidence they need to cut rates, likely starting in September.

The inflation data also offered encouraging news for US President Joe Biden ahead of the Presidential elections in November amid calls from fellow Democrats for him to step aside as the party’s nominee. Biden cheered the data, saying it shows “significant progress” in fight against inflation.

Also Read: Oil extends gains after US inflation data pushes Wall Street to lift Fed rate cut bets; Brent stays above $85/bbl
 

Wall Street eyes two US Fed rate cuts in 2024

If US inflation remains low through the summer, most economists expect the Fed to begin cutting its benchmark rate in September. Wall Street traders expect two rate cuts this year and reacted swiftly to Thursday's data, pricing in a 90 per cent chance of a September rate cut, up from 70 per cent earlier. 

Traders moved forward bets on a second rate cut to November, with about even odds of a third rate cut by year's end. Banking giant JPMorgan and Macquarie also pulled forward their expectations for an initial rate cut to September from November and December, respectively. September is when futures traders expect officials to start rate reductions, according to CME Group's FedWatch Tool. 

Also on Thursday, Mary Daly, a key Fed official, suggested that the central bank should cut rates soon. Daly, president of the Fed's San Francisco branch, said she believed that slowing inflation and a cooling job market justify a reduction in interest rates. She did not address the specific timing of any rate cut. “I see it as likely that some policy adjustments will be warranted,” said Daly.

With inputs from AFP, AP, Bloomberg, and Reuters