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In June, US inflation dropped significantly to 3%, causing the dollar to weaken. This highlights the Federal Reserve’s success in controlling price pressures compared to other advanced economies like the UK, where inflation is at 8.7% and the Bank of England is struggling to manage it.
As a result of the positive data, major US stock indices reached 15-month highs. The two-year Treasury yield, which reflects interest rate expectations, hit a two-week low of 4.72%. Additionally, the US dollar index, measuring the dollar against a basket of currencies, reached its weakest level in 15 months.
The consumer price index’s annual increase slowed from 4% in May to 3% in June, marking the slowest inflation rate since March 2021. This was slightly lower than the expected 3.1%. Comerica Bank’s Chief Economist, Bill Adams, expressed optimism, stating, “After a period of high inflation affecting consumers’ purchasing power, the situation is improving.”
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The headline inflation rate has been moving closer to the Federal Reserve’s 2% target, having peaked above 9% last year. However, core inflation, which excludes volatile food and energy costs, has remained stubborn, raising expectations of further interest rate hikes by the central bank. In the June data, core CPI declined slightly from 5.3% to 4.8%.
Torsten Slok, Chief Economist at Apollo Global Management, commented, “Headline inflation is decreasing, but there is still a significant gap between the current 4.8% core inflation and the Fed’s target of 2%. This, combined with the recent employment report, is likely to result in another interest rate increase.”
The Federal Reserve has already raised its benchmark interest rate from near-zero to a range of 5% to 5.25% since the beginning of 2022. While they maintained rates in their most recent policy meeting in June to assess the impact of previous hikes, they have indicated that further increases are expected before the end of the year.
Recent labor market data also suggests that the Fed’s aggressive rate hikes are starting to cool the economy, with job growth slowing down. However, inflationary pressures persist, with unemployment at a multi-decade low and wages rising significantly above the Fed’s target inflation rate.
Sophia Drossos, economist at Point72 Asset Management, believes the Fed is likely to raise rates later this month. However, she also noted that the combination of the recent data and signs of cooling in the labor market makes the future actions of the Fed more uncertain after July. She stated, “The market is scaling back tightening expectations for the period following the July meeting, but it doesn’t indicate a potential rate cut this year. This is in line with a ‘higher for longer’ strategy, with the Fed pausing and evaluating the information before making its next move.”
In contrast, while the Fed is nearing the end of its monetary tightening campaign, the Bank of England (BoE) and the European Central Bank (ECB) are expected to continue raising rates. Futures markets predict the BoE will raise its benchmark rate by about 1% this year, reaching just over 6% by early 2024. The ECB, on the other hand, is projected to deliver approximately 0.5% more in rate increases this year.
Meanwhile, China’s economy is on the verge of deflation, with flat annual consumer price inflation in June. This has led to calls for more stimulus measures.
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