Inflation Fell in June, Giving Consumers a Break and Adding to Fed Rate-Cut Hopes

Consumer prices unexpectedly fell in June, giving some relief to household budgets and possibly confidence to Federal Reserve policymakers that their fight against inflation is working.

The Consumer Price Index, a widely watched measure of inflation, fell 0.1% in June from May, compared to statistically insignificant movement in May, the Bureau of Labor Statistics said Thursday.

That made for a 3% increase in prices over the previous 12 months, down from a 3.3% annual increase in May. Both the monthly and yearly price changes were lower than forecasts, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. 

The report gave more evidence that the uptick in inflation in the first quarter was more of a fluke than a sign that inflation was reigniting.

That could put the Federal Reserve on track to cut its influential fed funds rate, its main anti-inflation tool, by September, as financial markets are currently betting, shifting away from inflation-fighting mode.

"Turn up the music, because the Fed’s pivot party looks like it’s about to officially get started after today’s soft June CPI print," Ali Jaffery, an economist for CIBC, wrote in a commentary.

Markets Pricing in September Rate Cut

The Fed has kept the rate at a 23-year high since July, putting upward pressure on interest rates for mortgages, credit cards, and other borrowing in an effort to rebalance supply and demand and subdue the post-pandemic surge of inflation that started in late 2021.

Stocks, whose values are heavily influenced by expectations for interest rate movements, moved higher Thursday morning on the news that inflation was running cooler than expected. The yield on 10-year Treasury notes fell to its lowest level since March.

Market participants were pricing in an 89% chance of a September rate cut, up from 73% the day before, according to the CME Group's FedWatch tool, which forecasts rate cuts based on fed funds futures trading data.

Lower Inflation Spurred by Gas Price Decline

The decrease in inflation was largely due to gas prices dropping 3.8% after seasonal adjustment.

Better still from the perspective of policymakers, “Core” inflation, which excludes volatile prices for food and energy, rose 0.1% over the month, down from 0.2% in May, and its smallest increase since January 2021. 

Economists closely monitor core prices to understand the future direction of inflation, since prices for food and energy can swing up and down for reasons that have little to do with broader inflation trends.