Nick Timiraos, a well-known financial journalist known as the "New Fed News Agency", commented on the US June CPI data, saying that US inflation slowed sharply in June, continuing the recent trend of slowing price increases, clearing the way for the Federal Reserve to cut interest rates in late summer. The following is the content of his article.
The Consumer Price Index (CPI), which measures the cost of goods and services across the economy, fell slightly from May, with year-over-year inflation falling to 3%, the lowest since June 2023. The core CPI rose 0.1% from May, the mildest gain since January 2021.
The report showed prices broadly cooling in the second quarter, less than economists had expected — a reversal from the first three months of the year, when inflation unexpectedly surged. “We’ve certainly seen a pretty sharp slowdown,” said Kevin Cummins, chief U.S. economist at NatWest Markets. “It’s certainly a confidence booster for the Fed.”
The report leaves the door open for a rate cut in September after Fed Chairman Jerome Powell said earlier this week that the labor market is slowing and is likely to weaken further, which is undesirable and has weakened a major source of inflation, setting the stage for a rate cut.
Investors do not expect the Fed to cut interest rates at its next meeting on July 30-31. Fed officials have not publicly tried to build a consensus on a rate cut and are unlikely to surprise markets except in special circumstances.
A bigger question for the July meeting is the extent to which officials laid the groundwork for a rate cut in September. San Francisco Fed President Mary Daly told reporters Thursday that she expects a rate cut may be needed in the near future, but she did not endorse taking action at the July meeting.
Daly said a decision on whether to cut rates at this meeting versus the next doesn’t have particular implications for the broader economy as long as “people understand where we’re probably headed,” and she said Powell’s greater emphasis this week on maintaining a strong labor market “was a pretty big communication signal” about where the Fed is headed.
After the CPI report was released, investors raised their bets that the Federal Reserve will cut interest rates twice this year, and the probability of a third rate cut also increased, which means the Fed may cut interest rates at its last three meetings this year, in September, November and December.
CPI sub-item data generally cooled down
Thursday’s report was particularly comforting for policymakers because it showed housing costs were slowing after a sharp rise in the wake of the pandemic. Housing inflation, which reflects the cost of renting a home, accounts for about a third of the CPI index and keeps overall prices elevated.
Economists and Fed officials have long expected this inflation to ease as rents for new housing units have cooled for a year and a half, but the figures tend to lag market conditions by many months. The latest report appears to be a reassuring confirmation that the official inflation measure is now capturing these developments.
Price increases were generally modest across all categories, with airfare and hotel accommodation costs falling particularly sharply compared to the previous month.
U.S. airlines have been slashing fares, a sharp reversal from a year ago when carriers struggled to quickly expand flights to meet demand. “Back then, everybody was traveling and it didn’t matter how much it cost,” Delta Air Lines Chief Executive Ed Bastian said in an interview Wednesday.
Airlines have added flights and cut fares this summer to accommodate record passenger numbers at U.S. airports. Delta Air Lines Inc. reported second-quarter earnings on Thursday that showed discounts drove a sharp drop in profits.
While inflation has cooled significantly over the past two years, many Americans aren't taking much comfort from the milder 12-month inflation readings because price increases for everything from cars to restaurant meals to housing have been unusually large so far in 2021. PepsiCo Inc., which also reported quarterly results Thursday, said executives there that shoppers tired of inflation are spending less. In past years, even as prices soared, many consumers were buying affordable foods like Doritos and Lays instead of big-ticket items like restaurants, concerts or travel. But now, they're limiting spending on everything, Chief Financial Officer Jamie Caulfield said.
“There’s a group of consumers who are becoming more price-conscious,” Caulfield said. “They’re looking for more deals, more bang for the buck.”
Meanwhile, auto insurance remains a hot spot for inflation, reflecting in part the lingering effects of earlier increases in auto prices, which have fallen recently, including in June.
The Fed’s work is far from done
On Thursday, losses in large technology stocks weighed on the S&P 500. But the Russell 2000 index of small and mid-sized companies rose sharply, reflecting the market's enthusiasm for the inflation report.
The Fed’s move to start cutting interest rates is particularly helpful to small businesses, which tend to have more floating-rate debt than larger companies.
U.S. Treasuries also staged a strong rebound, pushing their yields lower. The benchmark 10-year Treasury yield closed at 4.192%, down from 4.280% on Wednesday. Yield changes tend to broadly reflect investors' expectations for short-term interest rates set by the Federal Reserve.
There are signs that the economy has cooled, not enough to spark recession fears but enough to prompt the Fed to change its tone.
Officials are trying to balance risks including the risk of cutting rates too soon and allowing inflation to persist, and the risk of waiting too long and doing unnecessary damage to the job market.
The White House cheered Thursday's news. Biden has been trying this week to stem a tide of Democratic opposition to his reelection after disappointing debate performances and public appearances that failed to reassure voters concerned about his age.
“The CPI report shows that households are getting some very welcome breathing room in key areas of their budgets — not just lower inflation, but lower prices for gasoline, cars, airline tickets,” Jared Bernstein, chairman of the Council of Economic Advisers, said in an interview. “Our work is far from done, but this is a solid step in the right direction.”
Article forwarded from: Jinshi Data
