Annual inflation slowed to 3% in June, good news for the Biden administration, which has been touting "Bidenomics" for the past several weeks.
The drop of a full percentage point in headline inflation reported by the Bureau of Labor Statistics on Wednesday is a positive development in light of the Federal Reserve's efforts to lower price pressures by raising interest rates.
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The much-anticipated update to the consumer price index shows that, while inflation is still too high, it is cooling in response to the Fed’s aggressive interest rate hikes. The Fed has raised rates by a large degree since last March, with the target rate now 5% to 5.25%.
Wednesday’s report marks 12 straight months of declines in annual inflation after the rate peaked at a whopping 9.1% last June. The June report marked the smallest rise in annual inflation since March 2021.
Meanwhile, “core inflation,” which strips out volatile food and energy prices, fell to 4.8% in the year ending in June.
"Net, net, inflation isn’t dead, but the extraordinary pandemic push on prices from shortages and shift to stay-at-home purchases is clearly over, and the Fed, for the first time, has the upper hand in its inflation fight," said Chris Rupkey, chief economist at FWDBONDS. "The Fed can be more confident today that its higher interest rates policy is finally starting to bear fruit."
The Fed paused rate-hiking last month for the first time since its tightening cycle began, although officials were keen to indicate that the pause was expected to be temporary and penciled in the possibility of two more rate revisions by the end of the year.
Soaring inflation has battered households over the past two years and upended some support for President Joe Biden and his economic agenda. Republicans have used the rising prices as a cudgel to attack the administration and have blamed big spending bills, such as Biden’s pandemic relief legislation, as major drivers of inflation.
The report is a welcome sign for consumers, who have been buffeted by higher prices that have made life more unaffordable.
The rising cost of food, in particular, has been difficult for many households. The price of bread has risen 11.5% over the last year, while fats and oils have increased in price by 8.7%.
Meanwhile, some energy products, such as fuel oil, fell on a month-to-month basis, and many items were down heavily from the year before. Regular unleaded gasoline fell 26.5% on an annual basis, while motor oil dropped some 26.7%.
The country’s banking sector is still being closely watched following the sudden failure of Silicon Valley Bank in March. SVB’s downfall acted as a bit of a domino and led to a few other bank collapses, as well as some regional banks seeing their stock values plunge.
The federal government was able to step in and stymie the worst of the fallout, but economists are still keeping an eye on the banking system, given the overall volatility of the economy amid the Fed’s rate-hiking.
One strong spot for the economy is the red-hot labor market, which, while showing a few signs of cooling, is still roaring despite the barrage of rate hikes.
The economy added 209,000 jobs in June, the Bureau of Labor Statistics reported Friday. While still strong, that was below forecast expectations of 225,000, and it was the first report in months that came in below the consensus prediction. It was also the slowest pace of job growth since December 2020.
Another curious development in recent months is how the housing market, which many economists considered to have fallen into a recession last year, has heated back up given issues with the supply of existing homes.
In fact, home prices rose to record levels in May, increasing 0.7% nationally compared with April at a seasonally adjusted rate, according to a report from Black Knight released on Monday.
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Because mortgage rates are now so high, those who locked in sub-3% bargain mortgage rates during the peak of the pandemic are now holding off on selling. That means the inventory of homes is not keeping pace with demand and is driving up prices.
As of this past week, the average rate on a 30-year fixed-rate mortgage was 6.81%, according to Freddie Mac. Mortgage rates are now the highest they have been since November, when they skyrocketed to above 7%.