The monthly inflation rate fell in June for the first time in more than four years, providing additional cover for the Federal Reserve to start cutting interest rates later this year.
The consumer price index, a broad measure of the costs of goods and services across the U.S. economy, fell 0.1% from May, putting the 12-month rate at 3%, the lowest in more than three years, the Labor Department reported Thursday. The all-item index rate fell from 3.3% in May, when it was flat on a monthly basis.
This is the first time since May 2020 that the monthly rate has shown a decline.
Excluding volatile food and energy costs, the so-called core CPI rose 0.1% on the month and 3.3% from a year ago, compared with expectations of 0.2% and 3.4%, respectively, according to the report from the Bureau of Labor Statistics.
The annual increase in the base rate was the smallest since April 2021.
A 3.8% drop in gasoline prices helped keep inflation in check during the month, offsetting a 0.2% increase in food and shelter prices. Housing costs have been one of the most stubborn components of inflation, accounting for about a third of the weight in the CPI, so the slower pace of increases is another positive sign.
Stock futures rose after the report was released, while Treasury yields fell.
The June inflation report means the Fed is “one step closer to a September rate cut,” said Chris Larkin, managing director of trading and investment at Morgan Stanley’s E-Trade. “A lot could happen between now and September 18, but unless most of the numbers turn into ‘hot’ territory, there may not be a case for the Fed not cutting rates,” he added.
In addition to the decline in energy prices and the modest increase in housing prices, used vehicle prices fell 1.5% month-on-month and were down 10.1% from a year ago. This item was one of the main drivers of the initial rise in inflation in 2021.
The moderate inflation report means that average real hourly earnings for workers rose 0.4% on the month, though it is still just 0.8% higher than a year ago, according to a separate report from the Bureau of Labor Statistics.
While Federal Reserve policymakers are targeting an annual inflation rate of 2%, the June CPI report provides further evidence that the price trend is headed in the right direction.
The consumer price index peaked above 9% in June 2022, prompting the Federal Reserve to respond with a series of interest rate hikes that ended in July 2023. Since then, the central bank has kept its benchmark borrowing rate in a range of 5.25% to 5.50%, even as inflation has fallen sharply over the past few years.
Following the report, traders in the Fed funds futures market increased their bets that the central bank will cut interest rates starting in September.
“The latest inflation numbers put us on track for a Fed rate cut in September,” said Seema Shah, chief global strategist at Principal Asset Management. “The smallest increase in core CPI since 2021 gives the Fed confidence that the hot CPI readings in Q1 were a bump in the road and builds momentum for multiple rate cuts this year.”
Although Fed officials signaled at their June meeting that they could cut rates by a quarter-point this year, markets are now pricing in an initial cut in September followed by at least one more by the end of the year, according to CME Group’s FedWatch futures tracker. Traders were also pricing in a roughly 40% chance of a third cut by December.
In other economic news on Thursday, the Labor Department reported that weekly jobless claims fell to 222,000, down 17,000 from the previous week and the lowest level since June 1. Continuing claims, which lagged a week, fell to 1.85 million.
Correction: The Labor Department released its Consumer Price Index data on Thursday. An earlier version misstated the day.
