U.S. Inflation Slows, Fed Considers Interest Rate Hike

U.S. consumer prices rose a modest 0.2% in June and the rate of inflation slowed to the lowest level since early 2021, but recent progress might not be enough to prevent the Federal Reserve from raising interest rates in the near future.

Inflation Rate

The increase in consumer prices last month was smaller than expected, according to economists polled by the Wall Street Journal. The yearly rate of inflation decelerated to 3% from 4% in the previous month, marking the lowest level since March 2021.

Factors at Play

However, it's important to note that the decline in inflation isn't as significant as it may appear. The retreat of grocery and gas prices this year has contributed to a large part of the slowdown in inflation. Additionally, some substantial monthly increases in consumer prices that occurred in 2022 have been excluded from the yearly calculation of the inflation rate.

Core Rate of Inflation

The government reported that the so-called core rate of inflation, which excludes food and energy, also rose by a modest 0.2% last month. This marks the smallest increase in almost two years, falling below Wall Street's anticipated 0.3% gain.

The Federal Reserve considers the core rate as a better predictor of inflation trends. Although the increase in the core rate over the past 12 months has decreased to 4.8% from 5.3%, it still remains well above the central bank's 2% target and has stubbornly stayed elevated.

The Fed's Next Move: Interest Rates Expected to Rise

The Federal Reserve is widely expected to raise its benchmark short-term interest rate at its upcoming meeting on July 25-26. After a pause in June to assess the impact of previous rate hikes on inflation and the broader economy, the central bank is now ready to take action.

Inflation Slowly Coming Down

One of the key factors driving this decision is the gradual decline in inflation. After reaching a 40-year high of 9.1% last year, the rate of price increases has more than halved. However, the current rate of inflation is still not slowing fast enough to deter the Fed from raising interest rates further.

Concerns about Wage Growth and Housing Costs

Senior Fed officials are expressing concerns about a shortage of labor, which is leading to higher wages and making it more challenging to control inflation. Furthermore, they worry that housing costs, which have a significant impact on inflation, might not decrease as quickly as anticipated.

Balancing Act: Controlling Inflation While Avoiding Recession

The Fed acknowledges that higher borrowing costs can help slow down inflation by moderating economic growth. However, this approach also increases the risk of a recession.

Market Response

Following the release of the CPI report, stock markets experienced a rise, while Treasury yields slightly declined. Before the report, both the Dow Jones Industrial Average and the S&P 500 were set to increase in Wednesday trades. The yield on the 10-year Treasury note slipped to 3.95%.

Overall, the Fed's decision to raise interest rates reflects its ongoing commitment to balancing inflation control and economic stability.