Inflation Falls for the First Time Since the Pandemic
The Consumer Price Index fell in June on a monthly basis, the Department of Labor reported Thursday, marking the first time the cost of goods and services has registered a decline since May 2020, in the early days of the pandemic.
Prices fell 0.1% in June compared to May and were up 3% compared to a year earlier. Both results were softer than analysts’ expectations, driven by a drop in the price of gasoline, used cars and household goods.
Core CPI, a closely watched measure of inflation that leaves out volatile food and fuel prices, rose 0.1% in June on a monthly basis, the smallest increase since August 2021. On an annual basis, core CPI rose 3.3%, the smallest increase since April 2021.
The case for rate cuts: Calling the report “wildly encouraging,” Bloomberg columnist Jonathan Levin wrote, “On the inflation front, just about everything seems to be going right.” Noting that rent increases are cooling and used car prices are falling – both categories have been problematic sources of inflation – Levin called on the Federal Reserve to start lowering interest rates right away, to ensure that unemployment doesn’t become a problem in the coming months.
“The right move is to start lowering policy rates at the next decision on July 31,” Levin wrote, even as he admitted that rate cuts this month are unlikely. “The Fed has a dual mandate to promote maximum employment and stable prices, and recent developments leave real interest rates tight at a time when unemployment is creeping higher and job growth is slowing. Labor market trouble can snowball quickly and unpredictably once it begins.”
In a similar vein, RSM chief economist Joseph Brusuelas told The Washington Post that the report was “better than good.” In a separate blog post, Brusuelas said he is confident that inflation is falling toward the Fed’s target rate of 2% and the U.S. economy is “on the cusp of price stability.” Accordingly, he expects the Fed to cut rates by 25 basis points in both September and December, with larger cuts possible at the end of the year if the labor market shows further signs of softening.
Investors are betting that rate cuts are on the way, with the CME FedWatch probability of a September rate cut jumping to 84.6%. Seema Shah, chief global strategist at Principal Asset Management, said today’s CPI report “put us firmly on the path for a September Fed rate cut,” adding that the “smallest gain in core CPI since 2021 surely gives the Fed confidence that Q1′s hot CPI readings were a bump in the road and builds momentum for multiple rate cuts this year.”
Good news for Biden? Ordinarily, strong economic data would provide a boost to an incumbent president and would be especially welcome by one facing an election in just a few months. But as Semafor’s Jordan Weissmann observed earlier this week, the growing controversy over President Joe Biden’s age and aptitude is “burying good economic news for Democrats.”
Weissmann noted that positive reports on inflation and the labor market have been published since Biden and former President Donald Trump met in what turned out to be a disastrous debate for the current president. But the panic over Biden’s cognitive capabilities is claiming the political spotlight, making it impossible for Democrats to present their case to the American people that they have succeeded in fixing an economy that had been severely battered by the pandemic.
“There is broad frustration in the building that there will not be a political news cycle about this data,” a White House insider told the Washington Post’s Jeff Stein, who wrote about the same issue Thursday. “Everyone feels the strong inflation data is just getting lost in the political news right now. You can easily imagine an alternative political universe where this is the top story from the campaign.”
The inability of Democrats to turn the focus to fundamental economic issues could be disastrous in the fall, potentially producing an echo of 2016, when the recovery from the great recession engineered by the administration of former President Barack Obama wasn’t enough for Democrats to maintain control of the White House. “If Biden’s age problem proves politically fatal,” Weissmann wrote, “he could be setting up a repeat, handing off an economy with tame inflation, low unemployment, and falling interest rates to an opponent who will be happy to tout it as his own.”