US inflation surprisingly rose to 9.1% in June 2022, a four-decade high. Stock markets reacted lower and the Federal Reserve stepped up interest rate hikes. After that peak, inflation has fallen every month and consumer prices rose just 3% in June compared to 12 months earlier, according to data released by the Bureau of Labor Statistics on Wednesday.
Core inflation, which excludes more volatile food and energy prices, is higher at 4.8% but also lower than May’s 5.3% rise.
The year-on-year decline in inflation was a foregone conclusion. In June 2022, prices increased by 1.3% compared to the previous month. The base effect, i.e. the elimination of this month from the annual calculation, guaranteed a decline from the inflation rate of 4% in May.
Analysts’ forecasts pointed to headline inflation at 3.1% and core inflation at 5%. However, in one of these market paradoxes, investors expected inflation to remain below expectations.
Prices are rising at the slowest pace since 2.6% in March 2021. At this point inflation was spiraling out of control due to supply chain shortages, liquidity injected during the pandemic and increased demand due to the Covid-19 restrictions and later the war in Ukraine and its impact on energy, food and commodities.
Inflation is still well above the Fed’s price stability target of 2%. In addition, core inflation is well above this, prompting caution from central bank officials. After the money price explosion paused last June, the Fed will hike rates again on July 26, taking them to their highest level since 2001.
Most analysts think a 0.25 percentage point hike is a given, which would put rates in the 5.25% to 5.50% range. In addition, both the minutes of the last Monetary Policy Committee meeting and the speeches by Fed officials point in this direction. Three of them stressed on Monday that further rate hikes this year are needed to bring inflation back to the central bank’s target.
“We’ve made great strides on monetary policy over the past year,” Michael Barr, vice chairman of the Federal Reserve Board of Governors for oversight, said Monday at a meeting of the Bipartisan Policy Center. “I would say we’re close, but we still have a lot to do.”
Barr was not alone. “We’ll probably need a few more rate hikes later this year to get inflation back on a sustainable 2% path,” said Mary Daly, chair of the San Francisco Fed, at the Brookings Institution in Washington.
Cleveland Fed President Loretta Mester echoed the same sentiment at a Monday event at the University of California, San Diego: “My view is that the federal funds rate needs to move a little higher from its current level and, like us, stay there for a while Gather more information about the development of the economy.”
So far, the interest rate hikes have done little to cool the job market and have not triggered the recession that has been talked about for a year. The Federal Reserve may not have won the battle against inflation, but the price development is a relief for US President Joe Biden. Increases in food and gas prices hurt its popularity a year ago.
Now that inflation is easing, Biden is trying to convince some skeptical citizens of the achievements of his economic policies, particularly record job creation and investment in industry and infrastructure.
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