WASHINGTON —
Inflation cooled more than expected in June, helped by falling prices for cars, gas and airline tickets — a boost for the summer travel season — as well as some much-needed easing in the cost of housing, the government reported Thursday.
Overall, consumer price inflation for all goods and services rose 3% in June from a year ago, down from 3.3% the previous month.
And, importantly, the annual rate of inflation for groceries fell below the Federal Reserve’s 2% inflation target, thanks in part to solid yields of California’s specialty crops and dairy.
Whether in political terms the improvement will rally support for embattled President Biden remains an open question, but the good news may encourage the Fed to make a long-hoped-for cut in interest rates as early as September.
“There is light at the end of the tunnel finally after the central bank’s long battle with inflation and interest rate cuts, lots of them, are on the way,” said Chris Rupkey, chief economist at FwdBonds, an economic and markets research firm in New York.
High interest rates have weighed especially on small businesses and lower and middle-class consumers as the borrowing cost for credit cards, auto and home mortgage and equity loans have jumped to their highest in more than two decades.
Those rates are tied to policies set by the Fed. The central bank hiked its benchmark interest rate to a four-decade high last July in its effort to fight inflation, and has been cautious — too cautious, in the view of many economists — to start lowering rates.
Earlier this week Fed Chair Jerome Powell, while sounding more optimistic about an imminent policy change, said he wanted to see more good economic data before beginning to dial back interest rates.
In addition to Thursday’s inflation report, the most recent monthly employment statistics indicate that the labor market and wages are cooling but still advancing at a solid pace. Taken together, they are the kind of good data that Powell and his colleagues are looking for.
“The Federal Reserve’s 2% inflation target appears attainable, paving the way for potentially lower interest rates in the near future,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University in Los Angeles. “This shift could have significant implications for economic policy and business strategies moving forward.”
The inflation report showed that prices for auto insurance, hospital services, as well as shelter, which includes rents and makes up a big part of the overall consumer price index, remain elevated. But most analysts expect shelter inflation, 5.1% in June, to moderate in the coming months.
The outlook for food prices, another important category in forming consumer attitudes about inflation, also looks favorable. Prices for food at home were up just 1.1% in June compared with a year ago, down dramatically from 11% in the second half of 2022.
“We have not erased what happened in 2021 and 2022 so consumers are still feeling the pain,” said Ricky Volpe, an agribusiness professor at Cal Poly San Luis Obispo. But he noted that all the indications are that food inflation has cooled and will likely remain subdued over the near term, in part due to solid production in states like California, which is a big supplier of specialty crops, such as fruits, rice and nuts, and dairy.
Despite the current scorching conditions in many parts of California, he said, “This is the third winter in a row of above average precipitation,” a crucial component to the state’s food production capabilities. “Inflation is heading downward.”