US consumer prices decline, bringing Fed closer to rate cuts

In a surprising turn of events, US consumer prices fell marginally, highlighting the view that the disinflationary trend is getting firmer and puts the Federal Reserve closer to interest rate cuts.

The Bureau of Labor Statistics reported Thursday that the all-items seasonally adjusted consumer price index dropped 0.1 per cent in June after it was unchanged the previous month.

It's the second month in a row with low readings in core CPI, boosting confidence among Federal Reserve officials that inflation is finally cooling.

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The broad CPI rose 3.0 per cent in the 12 months through June, compared with a 3.3 per cent increase in May.

It is the weakest annual rise in a year. Economists surveyed by Reuters had expected a 0.1 per cent gain for June and a year-over-year increase of 3.1 per cent, showing how much of a surprise came in the figures.

The annual rise in consumer prices was at 9.1 per cent in June 2022, but the CPI remains significantly higher than measures monitored by the Federal Reserve for its 2 per cent inflation goal.

Other important measures for the Fed, PCE price indexes, climbed 2.6 per cent in May.

This also comes a few days after news that the unemployment rate ticked higher to 4.1 per cent in June from 4.0 per cent in May, which has not been this high since March 2020.

At the same time, economic growth has cooled in response to aggressive rate hikes by the Fed in 2022 and 2023.

Second-quarter gross domestic product is forecasted to rise at an annualised 1.8 per cent, well below the level concluded as strong enough to increase inflation, as considered by policymakers.

Although Federal Reserve Chair Jerome Powell acknowledged recent positive trends in price pressures, he remained cautious.

He told lawmakers this week that he wouldn't declare victory over inflation, saying "more good data would strengthen" the case for rate cuts.

With financial markets and many economists now considering that labour markets are cooling down and that the economy is slowing, they expect the Federal Reserve to kick off its easing cycle in September.

The central bank has left its benchmark overnight interest rate in the 5.25 per cent-5.50 per cent range since last July, following a 525 basis point hike to its policy rate since 2022.

Excluding food and energy—the two most volatile components—the CPI rose 0.1 per cent, following a 0.2 per cent increase in May.

A year ago, core CPI rose 3.3 per cent versus a 3.4 per cent increase in May, underscoring expectations that underlying inflationary pressures are continuing to cool.

(With inputs from Reuters)