US inflation falls to lowest level since 2021

Prices rose by 3 per cent in June, government data shows

A sign displays USD prices per gallon at a petrol station in Falls Church, Virginia. AFP

Consumer prices in the US have fallen to their lowest level since March 2021 in what is a positive sign for the Federal Reserve in its continuing battle to rein in the nation's inflation.

The consumer price index (CPI) rose 3 per cent year-on-year in June, down from 4 per cent in May, data released by the Labour Department on Wednesday showed. Prices rose by 0.2 per cent on a monthly basis.

Wednesday's data came in lighter than expected, with analysts predicting a year-on-year increase of 3.1 per cent.

Core inflation – which excludes food and energy – increased by 0.2 per cent last month, the lowest one-month gain since August 2021.

The shelter index remained the largest contributor to inflation last month, the Labour Department said. The indexes for air fares and used vehicles were among those that had decreased in June. The index for food rose by 0.1 per cent.

"Today’s report brings new and encouraging evidence that inflation is falling while our economy remains strong," President Joe Biden said in a statement.

Wednesday's data is encouraging news for the Fed, which has raised interest rates 10 times over the last 15 months in a battle to bring down price pressures.

The central bank has maintained inflation is still running above its long-term 2 per cent goal.

Fed Chair Jerome Powell and other Fed officials have maintained they expect interest rates to reach 5.6 per cent by the end of the year. With rates currently in the target range of between 5 and 5.25 per cent, that gives the central bank enough space for two additional raises of 25 basis points.

Traders anticipate a rate increase of 25 basis points at the Fed's July 25-26 meeting before keeping rates steady the remainder of the year, data from the CME Group showed.

Fed hopes of 'soft landing' still alive

Coupled with a recent government report that showed a cooling labour market, Wednesday's inflation data adds to growing evidence that the Fed's dream of achieving a soft landing remains in play. The central bank has been hoping that, by raising interest rates, it can slow down the economy without steering into a recession.

Economists are also beginning to revisit projections of a potential US recession. Goldman Sachs now predicts a 25 per cent chance of the US entering a recession in the next 12 months, down from its earlier estimate of 35 per cent.

Analysts at Moody's had also predicted the US would enter a recession in the second half of the year due to tight credit conditions.

Speaking in Europe last month, Mr Powell acknowledged a recession was possible but said it was not likely.

A survey released by the Fed on Wednesday showed that overall US economic activity had slightly increased since end of May.

Expectations were for continued slow growth for the coming months, the central bank said in its latest Beige Book, a compilation of surveys from all Fed districts.