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June Inflation Hits Two-Year Low, Offering Respite to Federal Reserve Amidst Surging Costs

June saw inflation drop to its lowest yearly rate in over two years due to a slowdown in cost acceleration and the comparison to a period when price hikes were soaring at their highest in over four decades.

The consumer price index saw a year-on-year increase of 3%, the smallest rise since March 2021. The index, which assesses a wide range of goods and services prices, climbed by 0.2% on a monthly basis. These figures contrast with Dow Jones estimates predicting 3.1% and 0.3% increases, respectively.

When discounting the fluctuating costs of food and energy, the core CPI rose by 4.8% from the previous year and 0.2% monthly, below the anticipated increases of 5% and 0.3%.

The data could provide the Federal Reserve some relief as it aims to curb inflation, which was nearing a 9% yearly rate around this time in 2022, a record high since November 1981.

“Significant strides have been made in managing inflation. While most of the nation grapples with high temperatures, inflation is beginning to cool," commented George Mateyo, Key Private Bank’s chief investment officer. He added that the Federal Reserve would find reassurance in these figures, validating their strategy of lowering inflation without stalling growth.

However, central bank policymakers often focus more on core inflation, which currently surpasses the Fed's annual 2% target. Mateyo doesn't believe the report will dissuade the central bank from implementing further rate increases this month.

Federal Reserve officials anticipate a continued decrease in the inflation rate, especially as housing costs ease, which contribute to about a third of the CPI weighting. Nevertheless, the housing index saw a 0.4% increase last month and an annual rise of 7.8%. This monthly rise represents approximately 70% of the headline CPI increase, according to the Bureau of Labor Statistics.

“Housing costs, a significant part of inflation, aren’t noticeably decreasing,” said Lisa Sturtevant, chief economist at Bright MLS. She explained that the fast-paced increase in rates by the Federal Reserve during the pandemic, followed by a swift rise, resulted in a decrease in housing supply by preventing homeowners from listing their properties for sale.

The report was met with a positive response from Wall Street, with Dow Jones Industrial Average futures rising nearly 200 points. Treasury yields were down overall.

Despite this, traders still expect the Federal Reserve to implement a quarter percentage point rate hike at the July 25-26 meeting. However, market expectations indicate this might be the final increase as officials pause to allow previous hikes to impact the economy.

Even though energy prices rose by 0.6% monthly, the headline CPI saw only a mild increase. Meanwhile, the energy index fell by 16.7% compared to a year ago, when gas prices were approximately $5 a gallon.

Food prices saw a minimal monthly increase of 0.1%, while used vehicle prices, a primary contributor to the inflation surge in early 2022, dropped by 0.5%. Airfare decreased by 3% monthly and is down 8.1% yearly.

The drop in CPI has positively affected worker salaries: real average hourly earnings, adjusted for inflation, grew by 0.2% from May to June and 1.2% on an annual basis. This represents a turnaround from last June's inflation peak, when wage growth consistently lagged behind the cost of living increases.


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