The consumer sector had some good news in Wednesday's data on inflation in the United States. In June, prices increased at a more gradual pace than in prior months, marking the annual growth rate's lowest point since March 2021.
The data, on the other hand, caused even more concerns about the next move that the Federal Reserve might make. Economists started having second thoughts about whether or not the Fed would keep hiking interest rates in September and beyond.
Core inflation, which excludes food and energy prices, has increased by 4.8% over the course of the past year. This comes in lower than the 5.0% that was predicted by analysts, but it is still far more than Fed’s 2% target.
The report did little to affect the widespread consensus on an anticipated 25 basis point rate hike at the central bank's meeting on July 26. This is because inflation is still over the Fed's objective, and the labor market is still showing signs of tension. On the other hand, the report sparked conversations about potential next steps following the July meeting.
Futures markets which are linked to the Fed's base interest rate are currently pricing in a 27% likelihood of a probable increase in interest rates by the end of November. This would be equivalent to a rise of 50 basis points. There was a 36% chance of two price hikes prior to the release of the CPI data.
Since the Fed halted its rate-hike campaign at their June meeting, Citi economists have been leaning toward two rate increases. This perspective, however, is shifting.
Despite the fact that the CPI slowed for one month, it is still likely that there will be an increase in July. However, a more moderate increase in prices will likely push back the possibility of an increase until November.
Tom Barkin, president, and chief executive officer of the Richmond Federal Reserve, gave a speech at an event in Maryland the day after the report was published on Wednesday. In his remarks, he stated that he needed to ensure that the data coming in going forward continued to bring down inflation.
While headline inflation has fallen sharply over the past year, economists warn that the road to a final reduction in inflation may take longer.
Even if the prices of cars and housing continue to fall, this could pose a danger to the goal of keeping core inflation below 3%. It's possible that it will take longer than anticipated for inflation to return to the 2% objective that was set by the Federal Open Market Committee.
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