WASHINGTON (AP) — Inflation in the United States fell for a third straight month in June, a sign of the worst price increase in four decades. steadily fading and could soon lead to rate cuts by the Federal Reserve.
In a better-than-expected report, consumer prices fell 0.1% from May to June after being flat the previous month, the Labor Department said Thursday. It was the first monthly decline in headline inflation since May 2020, when the economy was crippled by the pandemic.
And compared to a year earlier, prices rose 3% in June, down from 3.3% year-on-year in May.
The latest inflation numbers are likely to help convince Fed policymakers that inflation is returning to their 2% target. A brief spike in inflation early this year had prompted officials to scale back their expectations for rate cuts. Policymakers said they would need several months of mild price increases before they would feel confident enough to cut their key rate from a 23-year high.
The June numbers will qualify as another installment of the improved inflation data the central bank has been seeking. Should inflation remain low through the summer, most economists expect the Fed to begin cutting its benchmark interest rate in September.
“This confirms that the chances of inflation rising again are very slim and it is time for the Fed to cut rates,” said Luke Tilley, chief economist at Wilmington Trust, an asset manager.
Tilley noted that rent and homeownership costs fell significantly last month, a long-awaited development. Rents typically don’t change much from month to month, he noted, meaning the slower price increases in June are likely to continue.
AP correspondent Shelley Adler reports that consistent numbers show inflation is declining.
Also on Thursday, Mary Daly, a top Fed official, suggested the central bank should cut rates soon. Daly, president of the Fed’s San Francisco office, said she believed slowing inflation and a cooling labor market warranted a rate cut. She did not elaborate on the specific timing of a rate cut.
“I think it’s likely that some policy adjustments will be needed,” Daly said during a telephone news conference.
Even as inflation slows, the cost of food, rent, health care and other basic necessities is still much higher than it was before the pandemic, a source of public discontent and a potential threat to President Joe Biden’s re-election campaign.
Gas prices fell for the second straight month in June, with an average national decline of 3.8% from May. Gas prices are now down 2.5% from a year ago. (They did rise this month, averaging $3.54 nationally on Thursday, according to AAA, up 10 cents from a month earlier.)
Grocery prices rose just 0.1% last month, the first increase in five months, and are only 1.1% higher than a year ago. Food prices are still up an average of 21% since March 2021, when inflation began to rise, though average American wages have also risen sharply since then.
Excluding volatile food and energy costs, so-called core prices rose just 0.1% from May to June, down from 0.2% the previous month. Measured against 12 months earlier, core prices rose 3.3% in June, down from 3.4% in May. Core prices are thought to provide a particularly telling signal about where inflation is likely to go.
The cost of new and used cars also fell last month. Used car prices, which had skyrocketed during the pandemic recovery, have fallen 10.1% over the past year.
Rent and homeownership costs, which make up more than a third of the entire consumer price index, rose more slowly last month, by 0.3% from May to June. That’s the mildest increase in nearly three years, and it could signal that a long-awaited slowdown in rent increases has finally arrived. Compared with a year earlier, rents still rose 5.1% in June, a much faster pace than before the pandemic.
Rents are typically among the last inflationary dominoes to fall, a move economists are encouraged by in June’s smaller increase. A surge in apartment construction over the past two years has brought many new units online, forcing some landlords to keep an eye on rents to attract tenants. (The government also uses rent data to calculate the cost of homeownership, which grew more slowly last month after years of rapid acceleration.)
Most of the other major factors that have driven inflation over the past three years — groceries, used cars, gasoline — have either stabilized or declined. Rent increases had remained persistently high through June.
“This is a very, very good sign that the (price) weakness that we’ve been expecting for a year and a half is finally starting to happen,” said Alan Detmeister, an economist at UBS Investment Bank. The decline in home prices, he said, “will give (Fed officials) a sense that the inflation slowdown is a little more sustainable.”
Still, a rent hike early this year dealt a painful blow to Deborah Stettler’s finances. Stettler, a 51-year-old resident of Quincy, Massachusetts, said her rent jumped from $1,500 a month to $2,000 in January.
Stettler, a single mother of a 16-year-old son, also continues to struggle with the sharp rise in food prices over the past three years. She gets about half of her family’s food from a local food bank. For the rest, she looks for deals at grocery stores.
Stettler got a new job in child protective services about nine months ago, after previously working at a YMCA branch.
“The rent went up, the food went up, the pay didn’t go up,” she said. “I still go to the food bank for food assistance, because by the time you pay all your bills, you don’t really have much money left for food.”
Many consumers have cut back on their grocery spending, seeking deals and cheaper alternatives to name brands. On Thursday, PepsiCo acknowledged that sales volume declined 4% in North America in the April-June quarter, after the company aggressively raised prices for two years.
“For specific consumers, we need new entry prices and probably new promotional mechanisms that do not expect the consumer to invest so much money in purchasing a salty snack,” said CEO Ramon Laguarta.
The Fed has kept its key interest rate unchanged for nearly a year after raising it sharply in 2022 and 2023, leading to more expensive mortgages, auto loans, credit cards and other forms of borrowing for consumers and businesses.
Inflation is now well below its peak of 9.1% in mid-2022. Other measures suggest the economy is healthy, although slowing down: Unemployment is still relatively lowhiring stays stable And many consumers Continue to travel, eat out and spend money on entertainment.
Core inflation cooled steadily in the second half of 2023, fueling expectations that the Fed would cut its key rate as many as six times this year. But then rapidly rising costs for auto insurance, apartment rentals and other services kept inflation high in the first three months of the year, prompting Fed officials to lower their forecast for rate cuts in 2024 to just one, from three. Wall Street traders are expecting two rate cuts this year, with the first in September.
In testimony before Congress on TuesdayFed Chairman Jerome Powell noted that the labor market has “cooled significantly” and is “not a source of broad inflationary pressures.” That marked a notable shift from his earlier comments, in which he suggested that rapid wage growth could perpetuate inflation because some companies were likely to raise prices to offset their higher labor costs.