Yahoo Finance Inflation cools in June, fueling hopes for interest rate cuts in September
Inflation cooled more than expected in June, helped by falling prices for cars, gas and airline tickets — a boost for the summer travel season — as well as some much-needed easing in the cost of housing.
Overall, consumer price inflation for all goods and services was 3% in June from a year earlier, down from 3.3% the previous month, the Bureau of Labor Statistics reported Thursday.
And, importantly, the annual rate of inflation for groceries fell below the Federal Reserve’s 2% inflation target, thanks in part to solid yields of California’s specialty crops and dairy items.
Whether in political terms the improvement will rally support for embattled President Biden remains an open question, but the good news may encourage the Fed to make a long-hoped-for cut in interest rates as early as September, giving a lift to sagging home sales.
“There is light at the end of the tunnel finally after the central bank’s long battle with inflation and interest rate cuts, lots of them, are on the way," said Chris Rupkey, chief economist at Fwdbonds, an economic and markets research firm in New York.
High interest rates have weighed especially on small businesses and lower- and middle-class consumers as the borrowing costs for credit cards, automobiles, home mortgages and home equity loans have jumped to their highest levels in more than two decades.
Read more: High interest rates are hurting people. Here's why it's worse for Californians
Those rates are tied to policies set by the Fed. The central bank hiked its benchmark interest rate to a four-decade high last July in its effort to fight inflation, and has been cautious — too cautious, in the view of many economists — to start lowering rates.
This week Fed Chair Jerome H. Powell, while sounding more optimistic about a policy change, said he wanted to see more good economic data before beginning to dial back interest rates.
In addition to Thursday’s inflation report, the most recent monthly employment statistics indicate that the labor market and wages are cooling but still advancing at a solid pace. Taken together, they are the kind of good data that Powell and his colleagues are looking for.
“The Federal Reserve's 2% inflation target appears attainable, paving the way for potentially lower interest rates in the near future,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University in Los Angeles. “This shift could have significant implications for economic policy and business strategies moving forward.”
If the Fed makes two quarter-point rate cuts this year, as some economists expect, that could shave as much as a full percentage point off the average 30-year fixed mortgage rate, currently about 7%. That probably would bring more buyers into the market and increase the supply of homes available for sale.
The inflation rate has been coming down in recent months as consumer spending has slowed, particularly among lower-income households, said Joseph Brusuelas, chief economist at the accounting firm RSM. Retailers such as Walmart and Target have offered more discounts, which helps explain why prices for many everyday goods, including home furnishings, kitchenware, toys and televisions, have been falling.
Prices, however, are still running hot for some services, such as auto insurance, hospital fees, child care and other personal services. Inflation for shelter, which includes rents and makes up a big part of the overall consumer price index, also remains elevated, although most economists expect continued moderation in coming months.
The outlook for food prices, another important category in forming consumer attitudes about inflation, also looks favorable. Prices for food at home were up just 1.1% in June compared with a year earlier, down dramatically from the year-over-year increase of 11% in the second half of 2022.
“We have not erased what happened in 2021 and 2022 so consumers are still feeling the pain,” said Ricky Volpe, an agribusiness professor at Cal Poly San Luis Obispo. But he noted that all the indications are that food inflation has eased and probably will remain subdued over the near term, in part due to solid production in states such as California, which is a big supplier of specialty crops, such as fruits, rice and nuts as well as dairy items.
Despite the current scorching conditions in many parts of California, he said, “This is the third winter in a row of above average precipitation," a crucial component to the state's food production capabilities. "Inflation is heading downward."
This story originally appeared in Los Angeles Times.
