Inflation rose just 0.2%, less than expected as consumers get a break

Inflation fell to its lowest annual rate in more than two years during June, the product both of some deceleration in costs and easy comparisons against a time when price increases were running at a more than 40-year high.

The consumer price index increased 3% from a year ago, which is the lowest level since March 2021. On a monthly basis, the index, which measures a broad swath of prices for goods and services, rose 0.2%.

That compared to Dow Jones estimates for respective increases of 3.1% and 0.3%.

Stripping out volatile food and energy prices, core CPI rose 4.8% from a year ago and 0.2% on a monthly basis. Consensus estimates expected respective increases of 5% and 0.3%.

In sum, the numbers could give the Federal Reserve some breathing room as it looks to bring down inflation that was running around a 9% annual rate at this time in 2022, the highest November 1981.

However, central bank policymakers tend to look more at core inflation, which is still running well above the Fed’s 2% annual target.

Fed officials expect the inflation rate to continue falling, particularly as costs ease for shelter, which makes up about one-third of the weighting in the CPI. However, the shelter index rose 0.4% last month and was up 7.8% on an annual basis.

Wall Street reacted positively to the report, with futures tied to the Dow Jones Industrial Average up more than 200 points. Treasury yields were down across the board.

Traders are still pricing in a strong possibility that the Fed will enact a quarter percentage point rate hike when it meets later this month. However, market pricing is pointing towards that being the last increase as officials pause to allow the series of hikes to work their way through the economy.

The muted increase for the headline CPI came even though energy prices increased 0.6% for the month. However, the energy index decreased 16.7% from a year ago, a time when gasoline prices at the pump were running around $5 a gallon.

Food prices increased just 0.1% on the month while used vehicle prices, a primary source for the inflation surge in the early part of 2022, declined 0.5%.

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