US CPI Fell to 3% in June, Fed Expected to Continue with Rate Hikes

Inflation in the US dropped to 3% annually in June, while the core consumer price index (CPI) fell to 4.8%. The data represents a notable retracement in inflationary pressures, but it will likely do little to affect the central bank’s interest rate trajectory.

Core CPI Fell to 4.8% in June

The annual inflation rate in the US cooled further down in June to 3%, compared to economists’ expectations of 3.1% and the May CPI of 4%.

Month-over-month (MOM), inflation rose by 0.2% in June, while economists were expecting an increase of 0.3%. This compares to the previous MOM change of 0.1%.

Core CPI, which does not consider erratic food and energy prices, stood at 4.8% last month, versus the estimated 5%. Compared to May, this represents a noteworthy drop from 5.3%. On a monthly basis, core inflation rose by 0.2%, while analysts were looking for a 0.3% jump.

More Hikes Likely On the Way

The latest CPI reading marks a significant decline in inflation from its 40-year peak of 9.1% seen in June 2022. This record-high rate prompted the Federal Reserve (Fed) to embark on an unprecedented rate-hiking campaign, delivering 500 basis points (bps) worth of interest rate increases over the past year.

Now, the US central bank faces a tough decision. The recent June jobs report showed that the US labor market is finally cooling down, though it will take longer for a significant drop in nonfarm payrolls. In particular, the US economy added 209,000 jobs last month, below the estimated 225,000 gain, marking the weakest monthly gain since December 2020.

Even though the new CPI data shows another decline in the inflation rate, some believe it will still not be enough for the Fed to stop raising rates. Last month, the US policymakers voted not to deliver an interest rate increase for the first time in more than a year. However, more than 92% of traders expect the central bank to lift the federal funds rate to the 5.25% – 5.50% range, according to the CME FedWatch Tool.

Fed officials have already suggested that further rate hikes may be necessary, with Chairman Jerome Powell hinting at a minimum of two more before the end of the year.

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