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US inflation falls to 3% in June
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U.S. inflation fell faster than expected to 3% in June, prompting investors to increase bets on interest rate cuts and pushing Treasury yields lower.
In an encouraging sign for the Federal Reserve as it debates how quickly to cut interest rates from a 23-year high, the annual increase in consumer prices was below May’s 3.3 percent rate.
It was also below economists’ expectations, compiled by Bloomberg, of 3.1 percent and was the first time inflation reached 3% since June 2023.
The dollar fell 0.6% against a basket of currencies after the release of the Bureau of Labor Statistics figures.
Treasury yields fell as traders increased their bets on two interest rate cuts this year and President Joe Biden said the figures showed the U.S. was “making significant progress in combating inflation.”
According to LSEG data, the probability of a September cut rose to 100% after the CPI data, compared with 72% before.
The inflation numbers come as the Fed seeks more evidence that price pressures are easing in the world’s largest economy. Fed Chairman Jay Powell said this week that the central bank needed “more good data” before it could cut interest rates with confidence.
“This is, without much caveat, an unequivocally good impression,” said Andy Schneider, senior U.S. economist at BNP Paribas. “If you’re the Fed, this is exactly what you wanted to see.”
Despite market expectations earlier this year of up to seven interest rate cuts in 2024, the Fed has so far kept its benchmark rate in a range of 5.25-5.5 percent, the highest since 2001.
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After Thursday’s figures were released, yields on two-year U.S. Treasury notes, which track interest rate expectations and move inversely to prices, fell to a four-month low. The two-year yield maintained that decline throughout the day, falling 0.12 percentage point to 4.51 percent.
Stocks fell as investors exited big technology stocks, with the S&P 500 ending the day down 0.9% and the Nasdaq Composite closing nearly 2% lower.
The BLS data also showed consumer prices fell 0.1 percent on a monthly basis, compared with economists’ expectations for a 0.1 percent increase. It was the first time since 2020 that monthly consumer prices fell.
Gasoline prices fell 3.8 percent during the month, while a rise in housing-related costs slowed. Both factors contributed to the overall decline in inflation.
Arguing that housing costs had turned a corner, Omair Sharif of Inflation Insights said he now expected inflation to be “significantly slower”.
Core CPI, which excludes volatile food and energy prices, rose 3.3 percent year-on-year, less than the 3.4 percent expected.
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Latest data reinforces Powell’s idea message to US lawmakers this week that the US economy is no longer “overheated,” with the labor market showing further signs of cooling.
Powell stressed that officials would try to avoid putting too much pressure on the economy by keeping interest rates too high for too long.
He added that Fed rate decisions would be made “meeting by meeting.”
“Taken together with the recent jobs data, it looks like a cut by September is almost certain,” said Matthew Raskin, head of U.S. rates research at Deutsche Bank. He added that the possibility of a July cut should also “at least be on the table.”
Additional reporting by Martha Muir
This article has been updated to correct the length of time since inflation was last at 3 percent.