Economy

US inflation slows to 3% as interest rate rises bite

Markets pricing in a more than 90% chance of quarter-point Federal Reserve rate rise this month even as inflation hits 27-month low

Markets are still betting on a quarter-point rate rise when the Jerome Powell's Federal Reserve meets at the end of the month, despite a bigger than expected fall in inflation. Photograph: Mandel Ngan/AFP via Getty Images

Nicholas Megaw
Wed Jul 12 2023 - 13:54

US inflation dropped to 3 per cent in June, lower than expected, in the latest sign that the Federal Reserve’s interest rate rises are having an effect on price pressures.

The annual increase in the consumer price index slowed from 4 per cent in May to 3 per cent, the slowest rate of inflation since March 2021.

Prices increased 0.2 per cent on a monthly basis in June, up from 0.1 per cent the previous month but less than economists had forecast. The annual figure was further helped by so-called base effects, as extremely large rises from June 2022 drop out of the calculations.

There was a more modest dip in the “core” CPI, which slowed to an annual rate of 4.8 per cent in June from 5.3 per cent. Core prices, which strip out volatile food and energy costs, rose 0.2 per cent month on month, compared with 0.1 per cent in May.

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The headline rate of inflation has been steadily moving closer to the Federal Reserve’s 2 per cent target after peaking at more than 9 per cent last June. However, core inflation has proven more sticky, raising expectations that the US central bank will need to raise interest rates further.

The Fed has lifted its benchmark interest rate to a range of 5-5.25 per cent from close to zero at the start of 2022. Officials kept rates steady at their most recent policy meeting in June, to take stock of the effect of previous rises, but have made clear that they expect further increases before the end of the year.

Labour market data released last week also suggested that the Fed’s aggressive rate rises were beginning to cool the economy, with jobs growth slowing. However, they also highlighted continued inflationary pressures, with unemployment still close to a multi-decade low and wages growing well above the levels that are considered consistent with the Fed’s target inflation rate.

Futures markets on Wednesday were pricing in a more than 90 per cent chance that rates go up by another 0.25 percentage points at the Fed’s next meeting at the end of July. – Copyright The Financial Times Limited 2023

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