US Inflation Slows to 3% as Interest Rate Rises Make an Impact.

July 12, 2023: The latest data reveals that inflation in the United States has decreased, reaching 3% in June. This figure is lower than expected and highlights the Federal Reserve’s interest rate increases influence on price pressures. The consumer price index showed a 4% annual increase in May, but it has slowed to its lowest level since March 2021.

Monthly, prices rose by 0.2% in June, slightly higher than the previous month’s 0.1% increase but still below economists’ forecasts. The so-called base effects also positively affected the annual inflation rate, as the calculations exclude substantial rises from June 2022.

The “core” consumer price index, which excludes volatile food and energy costs, experienced a more modest decline. It slowed to an annual rate of 4.8% in June from 5.3% in May. Month on month, core prices increased by 0.2% compared to a 0.1% increase in May.

While the headline inflation rate has been moving closer to the Federal Reserve’s target of 2%, core inflation has remained higher, suggesting that further interest rate hikes may be necessary. The Federal Reserve has already raised its benchmark interest rate multiple times, reaching a range of 5-5.25%. Although rates were kept steady in June to assess the impact of previous increases, further rate hikes are expected to occur before the end of the year.

The recent labor market data also indicates that the aggressive rate rises by the Fed are starting to cool the economy, as job growth has slowed. However, inflationary pressures persist, with unemployment remaining at historically low levels and wages growing above the levels consistent with the Fed’s inflation target.

In response to the CPI data, the two-year Treasury yield, which reflects interest rate expectations, fell to its lowest level in two weeks. Futures market traders also slightly reduced their bets on higher interest rates in the second half of the year, although an increase by the Fed is still anticipated in July.

US stock market futures rose, with the S&P 500 expected to open about 0.7% higher.

The decline in inflation is encouraging for consumers, as it eases the strain on their budgets and reduces the impact on essential expenses like gasoline and groceries. However, the Federal Reserve remains cautious and continues to assess the situation to determine whether this cooling trend will persist or if further action is needed.