US Annual Inflation Rate Eases to 3 Percent

A customer shops at a Safeway store in San Francisco, Calif., on June 11, 2024. (Justin Sullivan/Getty Images)

The U.S. annual inflation rate eased for the third consecutive month and came in below the consensus estimate, offering the Federal Reserve further evidence that progress is being made in returning to the central bank’s 2 percent target rate.

According to the Bureau of Labor Statistics, the consumer price index (CPI) slowed to 3 percent in June, down from 3.3 percent in May. The consensus estimate was 3.1 percent, and headline inflation was at a 12-month low.

This was the 39th consecutive month that the CPI was at or above 3 percent. The six-month annualized rate slipped to a nine-month low of 3.3 percent.

Consumer prices fell by 0.1 percent monthly, below the forecasted 0.1 percent increase. This was down from the flat reading in May and was the first report showing retail prices falling since the beginning of the COVID-19 pandemic.

Core inflation, which excludes volatile food and energy components, also eased to 3.3 percent last month, down from 3.4 percent the previous month. The projection was 3.4 percent.

On a month-over-month basis, the core CPI rose 0.1 percent, below the consensus forecast of 0.2 percent. This was down from the 0.2 percent gain in May.

The leading driver of the drop in prices was gasoline.

In June, the index for gasoline declined 3.8 percent after tumbling 3.6 percent in May. The overall energy index dropped 2 percent from May to June.

Crude oil prices have stagnated over the past several weeks, although they have shown signs of renewed momentum amid tightness in global petroleum markets.

U.S. crude prices are trading at about $82 per barrel on the New York Mercantile Exchange. According to the American Automobile Association (AAA), the average price for a gallon of gasoline is $3.55 per gallon, unchanged from a year ago.

The food index rose 0.2 percent. Within this category, supermarket prices climbed 0.1 percent, and food away increased 0.4 percent.

Shelter costs edged up 0.2 percent and are up 5.2 percent compared to the same time a year ago.

Shelter inflation remains a major factor for elevated inflationary pressures.

“Shelter costs have been a persistent inflation trouble spot, which is a double-whammy as it is also the most heavily weighted component in the CPI—as it is in most household budgets,” Greg McBride, chief financial analyst at Bankrate, said. “Shelter inflation has accounted for more than two-thirds of the increase in core CPI in the past 12 months. A long-awaited easing of shelter inflation has yet to materialize and 2 percent inflation will remain elusive as long as this continues to be the case.”

Services declined to a 5 percent inflation rate print, down from a 5.2 percent inflation rate.

The leading year-over-year price drivers in June were motor vehicle insurance (19.5 percent), medical care (3.3 percent), and personal care (3.2 percent).

The top components to record falling year-over-year prices were airline fares (negative 5 percent) and used cars and trucks (negative 1.5 percent).

The latest CPI data come after the Federal Reserve Bank of New York’s June Survey of Consumer Expectations showed that U.S. households’ one-year outlook for inflation eased for the second consecutive month to 3 percent. The dip was fueled by a broad-based drop in price prospects, from gasoline to food to rent.

The three- and five-year outlooks came in at 2.9 percent and 2.8 percent, respectively.

Looking ahead to the next CPI report, the Cleveland Fed’s Inflation Nowcasting model estimates the annual inflation rate will come in at 3.2 percent in July. The core CPI is expected to be 3.6 percent.

“With abundant signs of a cooling economy, the Consumer Price Index for June certainly constitutes the ‘more good data’ on inflation that Fed Chair Jerome Powell has said we need to see before the Fed can begin cutting interest rates,” Mr. McBride said. “With both headline and core readings coming in lower than expected, this aligns with a September interest rate cut.”

Market Reaction

U.S. financial markets stayed in positive territory before the opening bell, with the leading benchmark index up as much as 0.2 percent.

The Treasury market was submerged in a sea of red ink. The benchmark 10-year yield fell to 4.2 percent. The two-year yield plunged to below 4.52 percent, while the 30-year bond dropped below 4.42 percent.

The U.S. Dollar Index, a gauge of the greenback against a basket of currencies, plummeted below 105.

More Progress on Inflation Is Needed: Powell

Fed Chair Jerome Powell appeared on Capitol Hill for two days of testimony this week, conveying the message to lawmakers that monetary policymakers require “more good data” before they are confident enough to cut interest rates.

“After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress,” Mr. Powell said in remarks to the Senate Banking Committee on July 8. “More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”

Minutes from the central bank’s June Federal Open Market Committee meeting suggest that officials are undecided over how long to keep the benchmark federal funds rate at a 23-year high range of between 5.25 percent and 5.5 percent.

“Participants noted that the uncertainty associated with the economic outlook and with how long it would be appropriate to maintain a restrictive policy stance,” the minutes read.

The futures market is expecting the first quarter-point rate reduction at the September meeting, according to the CME FedWatch Tool.

However, Minneapolis Fed President Neel Kashkari said December is a “reasonable prediction” for when the first rate cut will be.

“We need to see more evidence to convince us that inflation is well on our way back down to 2 percent,” Mr. Kashkari told CBS’s “Face the Nation” program last month.

The updated June Summary of Economic Projections suggested monetary authorities only anticipate a single rate cut this year, lowering the median policy rate to 5.1 percent.

Officials also expected that the personal consumption expenditure price index, which is the Fed’s preferred inflation gauge, would reach 2 percent by 2026.

Speaking to the House Financial Services Committee on July 10, the Fed chief noted that the central bank can loosen monetary policy before inflation touches the institution’s 2 percent target.