Cooling prices pave the way for possible rate cuts

Cooling prices pave the way for possible rate cuts

The Federal Reserve’s path to lower interest rates gained clarity after a key inflation report Thursday. The consumer price index (CPI), a gauge of consumer goods and services, fell 0.1% in June from May, marking the first monthly decline in more than four years. The welcome news brings the annual inflation rate to 3%, near a three-year low.

Creating momentum for policy change

June data reinforces the case for the Fed to ease borrowing costs later this year. Stock markets reacted positively, with futures rising while Treasury yields fell. Analysts now believe a September rate cut is a strong possibility, barring a significant change in economic data.

Broader signs of easing price pressures

In addition to the headline number, the report offered some encouraging details. A significant decline in gasoline prices helped keep headline inflation at bay. Additionally, the core consumer price index, excluding volatile food and energy prices, rose modestly month over month and posted its lowest annual gain since April 2021. Housing costs, a persistent inflation driver, also showed signs of slowing.

Used car market reversal

Another notable element was the 1.5% monthly decline in used-vehicle prices, which had previously been a key driver of inflation. This ongoing trend, with used-car prices now down more than 10% year-over-year, is contributing to the overall cooling effect.

Positive signal for workers

The report also offered some positive news for workers. While annual wage growth remains modest at 0.8%, a 0.4% monthly increase in real average hourly earnings suggests some improvement in purchasing power.

The Fed will likely welcome easing

With inflation approaching the Fed’s 2% target, the June CPI report strengthens the case for a policy shift. The central bank is likely to see the data as confirmation that recent inflation pressures have been temporary and will pave the way for potential rate cuts in the coming months.

Avatar photo

Mattie B. Jiménez

Related Posts

Read also x