US Inflation Cools Down in June, Expected to Lower Rates in September

On Friday, July 26, the US Department of Commerce released the report “Personal Income and Outlays, June 2024.” The report showed that prices in the US rose moderately in June, with a decrease in commodity costs offsetting the rise in service costs. This indicates that inflation is improving, which may lead the Federal Reserve to begin cutting interest rates in September.

According to Reuters on Friday, the report indicated that consumer spending slowed slightly in June, with easing price pressures and signs of cooling in the labor market. Inflation is moving closer to the Federal Reserve’s target of 2%, which could prompt the Fed to consider rate cuts starting in September. The Federal Reserve will hold its next policy meeting on July 30th and 31st.

Olu Sonola, director of US economic research at credit rating agency Fitch Ratings, stated, “The key question now is whether the good momentum we’ve seen in the past three months will be interrupted before the September meeting.” “Based on recent developments in the labor market, the Fed may use next week’s meeting to lay the foundation for a rate cut in September.”

The report indicated that the Personal Consumption Expenditures (PCE) price index remained flat in May and rose slightly by 0.1% in June.

Commodity prices fell by 0.4% in May and by 0.2% in June, with automobile and parts prices dropping by 0.6%. Prices for furniture and durable household equipment fell for the third consecutive month, while prices for other durable goods rose by 1.8%.

Prices of other energy sources such as gasoline fell by 3.5% in June following a 3.4% decline in May, while clothing and footwear prices fell for the second consecutive month.

However, service costs rose by 0.2% in June, matching the increase in May. Housing and utilities costs rose by 0.2%, the smallest increase since March 2023, following a 0.4% increase in May. Rent has been a significant driver of inflation. Costs for financial services and insurance increased by 0.3%.

Transportation service prices fell for the third consecutive month. Over the twelve months ending in June, the PCE price index rose by 2.5%, marking the smallest year-on-year increase in four months, compared to a 2.6% increase in May.

When excluding the volatile food and energy components, the core PCE price index rose by 0.2% in June. Core PCE inflation increased by 0.182%. The May figure was revised upward from 0.083% to 0.127%.

These upward revisions explain why second-quarter core inflation was slightly higher than expected.

Over the twelve months ending in June, core PCE inflation increased by 2.6%, matching the May increase. Over the three months ending in June, the annualized core inflation rate was 2.3%, significantly slowing down from 2.7% in May.

Kathy Bostjancic, chief economist at Nationwide Mutual, stated, “The significant improvement in inflation data suggests that the intensification of first-quarter inflation was temporary.” “Furthermore, if rental inflation ultimately slows down as recent data indicates, inflation seems poised to return to a downward trend.”

Due to the Fed’s significant tightening of monetary policy in 2022 and 2023, economic demand has cooled. The average economic growth rate for the first half of this year was 2.1%, compared to 4.2% in the second half of 2023.

Since July of last year, the Federal Reserve has maintained the federal funds rate in the current range of 5.25% to 5.50%. The policy rate has been raised by 525 basis points since 2022.

The easing of inflation and the slowing labor market conditions have led financial markets to expect three rate cuts starting in September this year.

The report also indicated that consumer spending, which accounts for more than two-thirds of US economic activity, increased by 0.3% in June following a 0.4% rise in May. Previous reports showed a 0.2% increase in consumer spending in May, and April’s data was also revised upwards.

Last month’s spending was driven by a 0.4% growth in services, reflecting growth in housing and utilities, financial services and insurance, healthcare, and international travel.

Personal income increased by 0.2% in June after a 0.4% rise in May. Adjusted for inflation and taxes, disposable household income rose by 0.1% in June after a 0.3% increase in May, potentially reducing the savings available to consumers.

Economists at Bank of America Securities estimated that the accumulated excess savings during the COVID-19 pandemic amount to about $400 billion and are expected to continue at the current pace until the end of the year.

Veronica Clark, economist at Citigroup, noted, “The increase in savings indicates that consumers may be reducing spending and increasing savings for precautionary reasons.” “However, overall spending seems to be slowing down, while income is below expectations. If there is a divergence, the extremely low savings rate may mean that with a weak labor market, spending could see a more substantial decrease.”