US inflation and economic outlook for June

US prices rose somewhat in June as the declining cost of goods tempered a pitch in the cost of services, emphasizing an improving inflation environment that could set the Federal Reserve to start cutting interest rates in September.

In June, US prices experienced a moderate increase as the declining cost of goods helped balance a rise in the cost of services.

This trend indicates an improving inflation environment that might allow the Federal Reserve to consider cutting interest rates in September.

Key Highlights:

1. Consumer Spending and Inflation Trends:
   • Consumer Spending: Slowed down a bit in June.
   • Personal Consumption Expenditures (PCE) Price Index: Increased by 0.1% in June after being unchanged in May, aligning with economists’ expectations.
2. Goods and Services Costs:
   • Goods Prices: Dropped 0.2% after a 0.4% decline in May.
     • Motor vehicles and parts: Declined by 0.6%.
     • Furnishings and durable household equipment: Dropped for the third consecutive month.
     • Other long-lasting manufactured goods: Rebounded by 1.8%.
     • Gasoline and other energy goods: Decreased by 3.5%.
     • Clothing and footwear: Became cheaper for the second month in a row.
   • Services Costs: Increased by 0.2%, consistent with May’s gain.
     • Housing and utilities: Rose by 0.2%, the smallest increase since March 2023.
     • Financial services and insurance: Increased by 0.3%.
     • Transportation services: Dropped for the third straight month.
3. Yearly Inflation Measures:
   • Overall PCE Price Index: Climbed by 2.5% year-on-year, the smallest gain in four months, following a 2.6% increase in May.
   • Core PCE Price Index (excluding food and energy): Rose by 0.2% in June. The unrounded figure was 0.182%, with May’s figure revised up to 0.127%.
4. Core Inflation Trends:
   • Annual Core PCE Inflation: Increased by 2.6% year-on-year in June, matching May’s rise.
   • Quarterly Core Inflation: Increased at an annualized rate of 2.3% in the three months through June, down from 2.7% in May.

Federal Reserve’s Position and Economic Impact

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• Economic Growth: Slowed to an average of 2.1% in the first half of this year, compared to 4.2% in the second half of 2023.
• Federal Reserve’s Next Steps: The improving inflation environment and cooling labor market suggest the Fed might consider cutting interest rates in September. The Fed’s policy meeting on July 30-31 will likely set the stage for this potential rate cut.

Olu Sonola, head of US economic research at Fitch Ratings, remarked on the importance of maintaining the recent positive momentum into the September meeting, indicating that the Fed might use the upcoming meeting to prepare for a possible rate cut.

Kathy Bostjancic, chief economist at Nationwide, highlighted the much-improved inflation readings and noted that if rental inflation has indeed decelerated as recent data suggest, inflation appears to be on a sustained downward trend.

Overall, the combination of easing price pressures, a cooling labor market, and the Fed’s previous aggressive monetary policy tightening positions the US economy for a potential rate cut, signaling a cautiously optimistic outlook for inflation and economic stability.