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US Consumer Inflation Cools to Lowest Since Early 2021

July 12, 2023
"Today's report brings new and encouraging evidence that inflation is falling while our economy remains strong," President Joe Biden said in a statement.

U.S. consumer inflation cooled in June to its lowest rate since early 2021, according to government data released Wednesday -- an encouraging sign for policymakers battling cost-of-living pressures.

The key inflation gauge, the consumer price index (CPI), rose 3.0% from a year ago last month, the smallest increase since March 2021 and down from 4.0% in May, said the Labor Department.

The U.S. Federal Reserve has raised interest rates rapidly over the last year to ease demand and bring down price growth.

While Fed officials have signaled that further rate hikes are likely needed to bring inflation back to their 2% target, the June CPI report will heighten market doubts about the number of additional increases needed down the line.

"Today's report brings new and encouraging evidence that inflation is falling while our economy remains strong," President Joe Biden said in a statement, lauding the progress made while maintaining low unemployment.

In a further positive sign, Labor Department data showed that the monthly "core" rate -- excluding the volatile food and energy components -- came to its lowest reading since late 2021, at 0.2%.

"Too many Fed officials have made it clear that they think further hikes are needed," suggesting another bump this month, but a good CPI reading could change prospects of whether a rise in September is still needed, Pantheon Macroeconomics said in a report.

While the index for shelter remained the "largest contributor" to the overall monthly CPI increase and the index for car insurance also contributed, other areas saw declines including airfares and used vehicles, according to the Labor Department.

- 'Disinflation' ahead -

"We know rents are going to roll over, over the next several months, so we're going to see a lot of disinflation coming through the rest of this year," said Ryan Sweet, chief U.S. economist at Oxford Economics.

"That's good news for consumers," he told AFP, adding that he expects the Fed could end its tightening cycle in July.

"The labor market is showing signs of softening, inflation is coming down, we're still on that path to a soft landing, but it's a very narrow path," Sweet said.

The easing of underlying inflation was driven by a "plunge in airline fares" and dip in hotel room rates, along with a drop in used vehicle prices, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Although insurance and repair costs have rocketed over the past year, after a surge in new vehicle prices, "flattening demand and rising inventory are now pushing new vehicle prices down," he said. This means insurance and repair inflation will follow.

- Slowing to end quarter -

Key parts of inflation highlighted by Fed Chair Jerome Powell, including the core readings for goods and services, have "slowed to end the second quarter," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

"While inflation remains elevated, the deceleration will be welcome news to policymakers," she added in a note.

But these data are not likely to change the outcome of a Fed officials' meeting later this month, with a rate hike of 25 basis points the most likely outcome, Farooqi said.

Copyright 2023, Agence France-Presse

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