Inflation Cooled Further in June (2024)

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The inflation cool-down was good news for all the right reasons.

After stripping out food and fuel prices, the “core” price index climbed 3.3 percent compared to a year earlier, down from the previous report.

• Overall, prices dropped 0.1 percent from May. The core index ticked up only slightly.

• “This is the inflation report that we’ve been waiting for,” said Neil Dutta, head of economic research at Renaissance Macro.

• The Fed has held borrowing costs at relatively high 5.3 percent for the past year to cool the economy by weighing down demand for big, debt-funded purchases

• There is mounting evidence that inflation is coming under control, which could pave the way for a rate cut in the coming months.

• Investors increasingly think that the central bank will lower borrowing costs at its Sept. 17-18 meeting

• Mr. Dutta said he thought that the Fed could even consider cutting interest rates at its July meeting.

• Fed officials are focused on striking the right balance: “If we loosen policy too late or too little, we could hurt economic activity,” Jerome H. Powell, the Fed chair, said during congressional testimony this week. “If we loosen policy too much or too soon, then we could undermine the progress on inflation.” He did little to push back on expectations of a rate cut in September.

• Fed policymakers target 2 percent annual inflation, based on the Personal Consumption Expenditures inflation measure. June’s P.C.E. data are set for release on July 26, a few days before the central bank’s next meeting.

• Shelter costs finally cooled in June, something Fed officials have been waiting to see, because they make up a big chunk of overall inflation and tend to move slowly.

• Prices of travel-related services like airline fares and hotel rooms fell, and a range of other service costs climbed more slowly. Goods prices continued to remain flat or fall in June.

• The broad-based slowdown will likely provide welcome relief to consumers. That could benefit President Biden, who has struggled to take credit for strong growth and a solid labor market at a time when voters are fixated on high prices.

• The report “shows that we are making significant progress fighting inflation,” Mr. Biden said in a statement.

• The Fed’s focus is increasingly turning toward the job market. Central bankers try to achieve both slow, steady inflation and a strong labor market.

• The unemployment rate has ticked up to 4.1 percent, up from 3.6 percent last June. Employers have fewer unfilled job openings, and wage growth is cooling.

• “Elevated inflation is not the only risk we face,” Mr. Powell said this week.

Housing costs, long stubborn, show signs of easing.

Economists, including officials at the Federal Reserve, are paying particularly close attention to housing because it is by far the largest component of the Consumer Price Index, accounting for more than a third of the overall measure. It has also been one of the most surprisingly sticky categories: Forecasters have been predicting that housing inflation would cool for more than a year now but have been persistently disappointed.

Those forecasts were based on data from private companies like Zillow and Apartment List showing that rent growth has slowed dramatically in much of the country. Zillow’s data, for example, shows that annual rent growth nationally peaked at nearly 16 percent in early 2022, but has now fallen to just 3.4 percent — slower than before the pandemic. In a few markets such as Austin, where newly built apartments are coming on the market, rents are falling outright.

The government’s measure of rents tends to move more slowly than the private-sector sources, and is less prone to wild swings. That’s partly because the private data only includes homes when they turn over to new residents; the government’s data attempts to capture monthly expenses for all renters, including those who renew their leases. (There are also other methodological and conceptual differences between the public and private measures.)

Still, economists have been surprised by how long the gap between the measures has persisted, and some forecasters began to worry that it might never fully close — that demographic forces, or changes in the housing market during the pandemic, could keep housing inflation higher long-term. That would make it significantly harder for the Fed to bring overall inflation back to its long-run target of 2 percent.

The data released Thursday may help ease those worries. Rents were up 5.1 percent from a year earlier, and have risen at just a 4.1 percent annual rate over the past three months. And the government’s measure of costs for homeowners, which had been particularly stubborn in recent months, rose at its slowest pace since 2021 on a monthly basis. (In the confusing approach to housing inflation used by economists, homeownership costs in the Consumer Price Index are based on rents, not on the direct expenses of buying or owning a home.)

Greg McBride, chief financial analyst at Bankrate, called the housing numbers “a long-awaited easing.”

“One-in-a-row is not a streak,” he wrote in a note to clients, “but more readings like this in the months ahead is consistent with getting inflation down to a 2 percent annual rate.”

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Prices are also cheaper than a year earlier, a continuation of a trend that’s been playing out since early 2024. They’re still a lot pricier than pre-pandemic, but this could offer vacationers at least a bit of relief.

Food inflation saw a slight uptick in June.

Food inflation also saw a slight uptick compared to a year earlier. Food prices were up 2.2 percent in the year through June, up from 2.1 percent in May. The annual rate has, for the most part, been steadily easing since reaching a peak of 11.4 percent in August 2022.

Prices for fruits and vegetables declined 0.5 percent in June after remaining flat the previous month. Meats, poultry and fish prices declined 0.1 percent, down from the month before, when prices rose 0.3 percent. Prices for dairy and related products climbed 0.6 percent over the month.

Egg prices, which began to surge in 2022 and have fluctuated since, rose 3.5 percent over the month. That follows several months of price declines. Egg prices fell 0.4 percent in May and 7.3 percent in April.

Food price increases had been slowing for months as transportation and raw material costs eased. Still, food costs have spiked over the past few years and have not fallen overall. That has posed a political challenge for President Biden ahead of the election as consumers continue to struggle with high grocery bills. Compared to four years ago, grocery prices are up about 20 percent.

Michelle Brady, 53, a local school district worker who lives with her husband in Cartersville, Ga., said they have tried to eat fewer meals each day and buy more store brand items to deal with high grocery costs. She said the cost of meat has particularly strained their budget, and prices for chuck roast and steak have become “out of this world.” Although she said she received two one-time bonuses over the past few years, those increases have not been enough to keep up with the rate of inflation.

“We’re having to watch how much we buy,” Ms. Brady said. “Things are not the same.”

Ms. Brady said she did not necessarily blame President Biden for the spike in grocery costs. Still, she said she was skeptical that she would see better prices at the grocery store and she planned to sit out the election because she did not feel compelled to vote for any candidate.

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“The Fed is a risk-management enterprise, and that’s why it’s important to recalibrate policy,” he says. That meeting takes place July 30-31.

It reflects investors’ expectation that the Fed will now cut rates in September — before the numbers were released, that outcome was deemed likely, but not certain.

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Egg prices rose 3.5 percent over the month. That follows several months of price declines. Egg prices declined 0.4 percent in May, and 7.3 percent in April.

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This is the second month in a row in which there has been effectively no inflation on a month-to-month basis. Prices were flat in May and down in June.

That’s still a strong performance, but it conveys a greater sense of caution as unemployment rises and inflation falls.

Powell laid the groundwork for a policy pivot as he spoke to Congress this week, and another sign that inflation is easing would most likely build investor confidence that, for the first time since the coronavirus pandemic struck in 2020, interest rates could be moving lower.

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As inflation cools, political pressure on the Fed ramps up.

But using high rates to cool inflation is an unpleasant process. High borrowing costs make it tough for young families to buy houses and expensive for people who carry credit card balances to keep up with interest payments. Over time, they can lead to high unemployment, costing working Americans job opportunities and wage growth.

That is why politicians typically chafe against high interest rates when they are in office. When Donald J. Trump was president, he railed against Fed policy. President Biden generally avoids directly commenting on rates out of respect for the Fed’s independence, but other prominent Democrats including Senators Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio have increasingly criticized the Fed.

“Keeping rates too high for too long threatens workers’ paychecks while keeping other costs high — particularly housing,” Mr. Brown said this week during a Senate hearing with Jerome H. Powell, the Fed chair. Republicans, by contrast, have suggested that the Fed should avoid lowering interest rates in the run-up to the 2024 election, since such cuts could boost markets and the economy ahead of the vote.

While high rates can be punishing — and draw political backlash from the incumbent party — Fed policy is the nation’s first line of defense when it comes to fighting rapid inflation.

Congress, the White House and local officials can pass policies that help cool inflation by improving the supply of goods and services, for instance by allowing immigration that helps to alleviate labor shortages or changing zoning codes so it is easier to build more housing. But those policies tend to be slow-moving and piecemeal.

That leaves high-interest-rate policy as the main tool to fight inflation, albeit a deeply unpopular one.

That’s why central banks around the world are generally insulated from politics, allowing them to make potentially painful short-term rate choices to achieve long-term benefits without worrying about elections. Research shows that independent central banks do a better job of controlling inflation. Places like Turkey have illustrated that when central bankers aren’t free from political whims, prices can spiral higher.

In the Fed’s case, independence means that the central bank’s policy-setting Federal Open Market Committee sets rates without sign-off from the White House or from Congress.

Political criticism of Fed policy is nothing new — Lyndon B. Johnson reportedly physically accosted the Fed chair in the 1960s, Nixon successfully pressured the Fed chair in the 1970s, George H.W. Bush blamed the Fed chair for his 1992 defeat, and Mr. Trump once called Fed officials “boneheads.” (Mr. Powell said this week that he had not been asked to meet privately with Mr. Biden over the past two years, and that the current White House “has been very respectful” of the Fed’s autonomy.)

But there is big a difference between political complaining, which central bankers can choose to ignore, and changes to the Fed’s structure or goals. There is some concern among economists that if Mr. Trump wins re-election, he could go beyond talking and try to curb the Fed’s ability to set policy freely.

Mr. Trump flirted with trying to fire Mr. Powell in his first term, but he never tried it. Removing the Fed chair would be difficult, and possibly illegal, though it has never been tested.

Mr. Trump’s campaign has been quiet on the topic. But the conservative Heritage Foundation has proposed “major reform of the Federal Reserve’s core activity of manipulating interest rates,” along with ways in which the administration could tie the central bank’s hands and limit their ability to set the price of borrowing money.