Inflation data released on Wednesday could show a significant slowdown in inflation and provide some of the most hopeful news since the Federal Reserve began curbing rapid inflation 16 months ago. However, some economists warn against announcing victory now.
Economists expect the consumer price index to have risen about 3.1 percent for the year through June, a significant slowdown from 4 percent in May and far less than last summer’s peak of about 9 percent.
The significant drop would be due, among other things, to the fact that prices this year will be measured against the very high prices of last summer and, in particular, the cost of gas has fallen compared to last summer. However, the improvement is expected to extend beyond these annual headline numbers to a monthly measurement that excludes food and fuel prices to give a sense of the underlying trend in price pressures. This “core” metric is expected to have risen about 0.3 percent — the first time in seven months it would have risen less than 0.4 percent.
Such a drop would undoubtedly be good news and a sign that inflation is cooling back towards the Federal Reserve’s 2% target. However, economists say that even the Fed’s significant slowdown would not show that inflation is completely defeated and that it probably would not be enough to convince officials not to raise interest rates at their July 25-26 meeting to raise again.
“You’ve been surprised by CPI before,” said Alan Detmeister, a former Fed economist and now at UBS, ahead of the release. “They’re a little worried they’re going to be faked again.”
Inflation is expected to have moderated in June for several important reasons. Market-based rents have increased at a much slower pace over the past year, or even decreased in some markets, which is gradually being reflected in official inflation data, which should represent a sustained trend. Used car prices, which unexpectedly rose sharply at the beginning of the year, will fall. And a range of products and services, including airfares and hotel rooms, are likely to slowly fall or rise in price in this month’s data.
But that last category could overstate how much inflation is falling, Mr Detmeister said. Inflation data is adjusted to smooth out seasonal trends. However, because the prices of some products and services – including travel-related prices – have changed significantly in recent years, these seasonal adjustments are currently unconventional. They’re likely to bring inflation down this summer before pushing it back up in the fall.
This means that while the cooling inflation data gives real cause for hope, the Fed will likely be wary of a winning lap.
“It would be a mistake” to “declare victory” too early, Loretta Mester, the president of the Federal Reserve Bank of Cleveland, said in a call to reporters this week.
The central bank has been raising interest rates since the beginning of 2022 to compensate for price increases caused by a slowdown in the economy. Officials refrained from raising interest rates at their June meeting to allow more time to see how the economy is coping with higher borrowing costs.
However, policymakers have been clear that they believe interest rates need to be raised higher to ensure inflation returns fully and quickly to their 2% target, which they define using a more lagged but related measure of inflation.
Many economists are expecting to hike rates this month even if CPI inflation numbers show significant moderation – although some, like Mr Detmeister, believe weaker inflation numbers could make officials less likely to raise rates in the US raise again this year.
John C. Williams, President of the Federal Reserve Bank of New York, called part of the slowdown in inflation so far — part due to cheaper fuel and more modest increases in the price of goods — a “free lunch.”
“It’s really a reversal of some of the impact of the pandemic and an easing of supply chain constraints,” he said in an interview with the Financial Times. But “to bring inflation to 2 percent, not only must demand for labor continue to fall, but unemployment must also increase somewhat.”
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