WASHINGTON- Annual US inflation rose at its slowest pace in more than two years in June, with underlying price pressures receding, a trend that, if sustained, could push the Federal Reserve closer to ending its fastest interest rate hiking cycle since the 1980s.
The improving inflation environment was reinforced by other data on Friday showing labor costs posted their smallest increase in two years in the second quarter as wage growth cooled. It mirrored reports this month showing the economy shifting into disinflation mode, with consumer prices moderating sharply in June and producer inflation muted.
That, together with labor market resilience, which is underpinning consumer spending, raised cautious optimism of a “soft landing” for the economy envisaged by Fed officials rather than the recession that most economists have been predicting.
“The inflation outbreak is winding down quicker and with less pain for the labor markets than economists could have imagined just a year ago,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “This means policymakers can most likely skip a rate hike at the upcoming September meeting.”
The personal consumption expenditures (PCE) price index increased 0.2 percent last month after edging up 0.1 percent in May, the Commerce Department said. Food prices dipped 0.1 percent while the cost of energy products increased 0.6 percent . In the 12 months through June, the PCE price index advanced 3.0 percent . That was the smallest annual gain since March 2021 and followed a 3.8 percent rise in May.
Excluding the volatile food and energy components, the PCE price index gained 0.2 percent after rising 0.3 percent in the prior month. That lowered the year-on-year increase in the so-called core PCE price index to 4.1 percent , the smallest advance since September 2021.
The annual core PCE price index climbed 4.6 percent in May.
Economists polled by Reuters had forecast the core PCE price index would gain 0.2 percent and rise 4.2 percent on a year-on-year basis. They calculated that the “super core” increased 4.1 percent on a year-on-year basis after rising 4.7 percent in May. This measure of services less housing is being closely monitored by policymakers to gauge progress in the inflation fight.
The PCE price indexes are the Fed’s preferred inflation measures for its 2 percent target.
The core PCE price index reading in June was just above the Fed’s recent forecast of 3.9 percent for the fourth quarter of 2023.
The US central bank on Wednesday raised its policy rate by 25 basis points to the 5.25 percent -5.50 percent range, a level last seen just prior to the 2007 housing market crash and which has not been consistently exceeded for about 22 years.
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury prices rose.
Annual inflation is easing as last year’s surge drops out of the calculations. Food commodity prices are back at levels seen prior to Russia’s invasion of Ukraine in February 2022.
A separate report from the Labor Department showed the employment cost index, the broadest measure of labor costs, rose 1.0 percent in the second quarter. That was the smallest increase since the second quarter of 2021 and followed a 1.2 percent advance in the January-March period. Labor costs increased 4.5 percent on a year-on-year basis after shooting up 4.8 percent in the first quarter.
The ECI is viewed by policymakers as one of the better measures of labor market slack and a predictor of core inflation because it adjusts for composition and job-quality changes.
Wages and salaries rose 1.0 percent in the second quarter, also the smallest gain in two years, after an increase of 1.2 percent in the prior three months. They were up 4.6 percent on a year-on-year basis after advancing 5.0 percent in the first quarter.
The moderation reflects cooling demand for workers. Wage growth, however, continues to exceed pre-pandemic rates.
“Employers are not feeling the same pressure to increase wages as they have in the past few years,” said Cory Stahle, an economist at Indeed Hiring Lab in Salt Lake City, Utah.
Inflation-adjusted wages for all workers accelerated 1.7 percent on a year-on-year basis after being unchanged in the first quarter. The largest increase in real wages in three years gave a boost to households’ purchasing power, helping to drive consumer spending and keep the economy afloat.
Consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.5 percent in June after gaining 0.2 percent in May, the Commerce Department report showed. The data was included in the advance estimate of second-quarter gross domestic product, which was published on Thursday. – Reuters
