US inflation fell sharply to 3 per cent in June, sending the dollar lower and highlighting the Federal Reserve’s relative success at bearing down on price pressures.
The improved picture in Wednesday’s data stands in sharp contrast to other advanced economies, such as the UK, where the Bank of England is struggling to control inflation of 8.7 per cent.
The major US stock indices closed at 15-month highs; the two-year Treasury yield, which moves with interest rate expectations, fell to a two-week low of 4.72 per cent; and the US dollar index, which measures the greenback against a basket of six currencies, hit its weakest point in 15 months.
The annual increase in the consumer price index slowed from 4 per cent in May to 3 per cent in June, the slowest rate of inflation since March 2021, compared with expectations of 3.1 per cent.
“After a punishing stretch of high inflation that eroded consumers’ purchasing power, the fever is breaking,” said Bill Adams, chief economist at Comerica Bank.
The headline rate of inflation has been moving closer to the Fed’s 2 per cent target after peaking at more than 9 per cent last year. However, core inflation — which strips out volatile food and energy costs — has proved more sticky, raising expectations that the US central bank will need to lift interest rates further.
Core CPI fell more modestly, from 5.3 per cent to 4.8 per cent in the June data.
“Headline inflation is coming down, but . . . there is still quite a distance to go from 4.8 per cent to where the Fed wants core inflation to be at 2 per cent,” said Torsten Slok, chief economist at Apollo Global Management. “Taken with the employment report [last week], this is still likely to mean another interest rate increase.”
The Fed has raised its benchmark interest rate to a range of 5 per cent to 5.25 per cent from close to zero at the start of 2022. Officials kept rates steady at their most recent policy meeting in June to take stock of the effect of previous rises, but have made clear that they expect further increases before the end of the year.
Labour market data released last week also suggested that the Fed’s aggressive rate rises were beginning to cool the economy, with jobs growth slowing.
However, it also highlighted continued inflationary pressures, with unemployment still close to a multi-decade low and wages growing well above the levels considered consistent with the Fed’s target inflation rate.