Will June have opened a season of falling inflation for the Fed?
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[July 12, 2023] By
Howard Schneider
WASHINGTON (Reuters) - A year after U.S. inflation peaked and touched
off an aggressive turn in monetary policy, Federal Reserve officials may
soon open a more encouraging chapter in their policy discussions with
the first of what many analysts expect to be a run of data showing
renewed declines in key price measures.
Consumer price index data for June will be released Wednesday morning,
with economists polled by Reuters expecting prices to have risen 3.1%
from a year earlier, a material leg down in an annual inflation rate
that clocked in at 4% in May and topped 9% in June 2022, the highest in
four decades.
A separate measure of underlying inflation, stripped of items like
energy and food that are tied to world commodity markets, is expected to
show a more modest change, falling to 5% from a 5.3% pace the month
before.
But economists and some Fed officials are starting to be more adamant
that a long-awaited steady turn down in so-called "core" inflation may
start with Wednesday's report on how prices behaved last month and
continue for the next few months.
"The June data is likely the leading edge of a string of softer core
inflation prints over the next several months," wrote Omair Sharif of
Inflation Insights, with drops in used car prices, signs of ebbing
demand in the service sector, an expectation for slower airfare
increases, and other factors all feeding into a combined easing of U.S.
price pressures.
A month of good inflation news won't push the Fed away from an expected
quarter point rate increase at the upcoming July 25-26 meeting.
The central bank has a 2% inflation target measured against the separate
Personal Consumption Expenditures price index, and a closely watched
version of it, also stripped of volatile food and energy prices, has
been lodged at around 4.6% since December.
Fed officials have said they need to see steady declines there to be
comfortable inflation is under control and on a dependable path back to
target.
'MOMENTUM' NOW ON THEIR SIDE?
Recent data has been somewhat ambiguous - slowing overall job growth for
example coupled with still strong wage increases some officials worry
will feed future inflation; an improved mood in recent small business
surveys offering evidence of economic resilience, but a boost as well in
the share of business owners planning to raise prices.
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The exterior of the Marriner S. Eccles
Federal Reserve Board Building is seen in Washington, D.C., U.S.,
June 14, 2022. REUTERS/Sarah Silbiger/File Photo
But, importantly, public expectations about inflation have remained
under control. A study released this week from the Cleveland Federal
Reserve's Center for Inflation Research found the long-term
inflation outlook was "anchored near the Federal Reserve's 2%
target," a finding generally shared by Fed policymakers who consider
any move higher in public inflation expectations a risk inflation
itself may accelerate.
The calendar is also turning in the Fed's favor, with some of the
worst inflation months falling from the calculations of annual price
increases, and recent, weaker data on housing rents set to become
more prominent in the numbers.
Supply pressures continue improving globally, and recent online
price data suggests easing goods prices. A measure of prices for
goods purchased online, maintained by software and analytics firm
Adobe, showed prices fell 2.6% in June, the largest drop since May
2020, led by an 8.3% drop in appliance prices and a 12.9% year on
year drop in electronics prices.
Fed officials, blindsided by the persistence of inflation they
initially thought would dissipate on its own, have been reluctant to
bank on good news continuing. Far from declaring victory over
inflation they've focused on the risks it might resurge, worried
over its stubbornness, and been more likely than not to pencil in
higher interest rates if there was any doubt.
But in recent projections 13 of 18 policymakers expected the Fed was
perhaps a quarter or a half a percentage point from its stopping
point for rate hikes, a fact that coming inflation data may help to
confirm.
Some feel inflation has turned to the degree event that may be
unnecessary.
In comments this week Atlanta Federal Reserve President Raphael
Bostic said he felt the Fed now "had momentum" in its inflation
fight and, in his view, won't have to raise rates again.
"The underlying data is actually telling a very positive story,"
Bostic said, and upcoming information may make that clearer.
(Reporting by Howard Schneider; Editing by Dan Burns)
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