Economists, investors, and Federal Reserve officials are increasingly optimistic about the state of U.S. inflation, with expectations that the latest consumer price report will show another month of mild increases. According to a survey of economists by FactSet, consumer prices in the United States are projected to have risen just 0.1% from May to June, with the data set to be released on Thursday morning.
The anticipated slight uptick in inflation for June is attributed to lower gas prices and a modest increase in grocery costs. This follows a month where inflation remained unchanged. Year-on-year, inflation for June is forecasted to be 3.1%, a decrease from the 3.3% recorded in May.
Despite the positive outlook on inflation, Federal Reserve Chair Jerome Powell and his colleagues remain cautious. Powell emphasized the progress made in slowing inflation towards the central bank's 2% target but highlighted the need for more positive data to support a potential reduction in the key interest rate, currently at a two-decade high of 5.3%.
While overall inflation appears to be moderating, essential expenses such as groceries, rent, and healthcare have significantly increased over the past three years, contributing to public dissatisfaction and posing a potential challenge to President Joe Biden's re-election prospects. Despite this, indicators suggest a healthy economy, albeit with a slowdown in growth. Unemployment rates remain relatively low, hiring is steady, and consumer spending on travel, dining out, and entertainment continues.
The Federal Reserve has maintained its key rate for almost a year after a series of aggressive hikes in 2022 and 2023 to combat high inflation levels. The current inflation rate is significantly lower than its peak of 9.1% in mid-2022.
If the June inflation data aligns with economists' expectations, it would likely be viewed as positive progress by the Federal Reserve. Core prices, excluding volatile food and energy costs, are predicted to have increased by 0.2% from May to June, consistent with the previous month, and 3.4% year-on-year, a notable decline from the 4.8% recorded in June 2023.
Core prices are closely monitored by Fed officials and economists as they provide insights into future inflation trends. Sustained increases of around 0.2% in core prices per month are generally in line with the Fed's inflation target.
While expectations for multiple rate cuts in 2024 were initially high, recent data on rising costs for services like auto insurance and apartment rents have tempered these forecasts. Wall Street traders anticipate two rate cuts this year, with a 75% likelihood of a cut in September, according to CME FedWatch.
Recent moderation in food and gas prices has helped keep inflation in check. Gas prices decreased by an average of 18 cents per gallon nationwide to $3.42 in mid-June, although they have since risen by 6 cents. Grocery prices are estimated to have increased by 0.2% last month and 1% year-on-year, reflecting a more than 20% increase over the past three years.
In his congressional testimony, Powell acknowledged a cooling job market that is not exerting broad inflationary pressures. Despite healthy hiring trends, the unemployment rate rose for the third consecutive month to 4.1%, indicating challenges for job seekers. The majority of recent job growth has been concentrated in government, healthcare, and the hospitality sector.
