The U.S. inflation rate declined 0.1% in June after the month’s CPI also dropped by the same percentage. This marks the first monthly decline in over four years, as the country has constantly increased CPI, raising concerns about more inflation.
What caused this decline, and will it continue to reduce? We answer that and more as you read on.
A Dip for the First Time in More Than 4 Years
For the first time in more than 4 years, the monthly inflation rate dipped in June 2024, further encouraging the Federal Reserve to reduce its interest rates later in the year’s second half.
This marks the first time since May 2020 that the monthly rate has declined. Since 2020, it has been increasing steadily, leading to the high inflation rates that the country has been dealing with for years.
CPI
Consumer Price Index, or CPI, measures the monthly change in the prices paid over time for consumer goods and services. According to the Labor Department, the CPI declined by 0.1% from May, putting the 12-month decline rate at 3%.
Reports also show that the all-items index rate fell from 3.3% back in May when it was flat monthly. Therefore, this is a good sign for the economy as it shows that inflation is coming down gradually.
Core CPI Increase
Core CPI also measures the price of a selection of goods and services but completely excludes some volatile items such as food and energy. Therefore, core CPI increased by 0.1% monthly and 3.3% a year ago, a slight decrease from last year’s numbers, which were at 0.2% monthly and 3.4%.
The Bureau of Labor Statistics (BLS) reported these numbers and reported that this core CPI rate was the lowest since April 2021.
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What Caused This?
There are a couple of reasons for the CPI reduction recorded in the past month. However, it can be narrowed down to three key factors. First is the decrease in gasoline prices across the country due to an increase in the use of electric cars and green initiatives.
Second is the reduction in housing prices in many states, and the third is the reduction in costs of vehicle prices (gas-powered vehicles).
Gas Prices
Over the past year, many states have followed California’s lead in going green and implementing strict climate change policies due to the constant threats posed by global warming. Therefore, people across the country are switching from gas-powered vehicles to electric vehicles (EVs).
This switch has caused a 3.8% decrease in gasoline prices, which held back inflation during the month. It also offset a 0.2% increase in food and shelter prices.
Housing Prices
Another constant source of the stubbornly consistent inflation rate is the country’s high housing cost. Since housing and real estate comprise a third of the CPI index, a constant rise in housing and real estate ensured an increase in CPI.
However, housing prices are constantly declining, and this trend is projected to continue throughout the bottom half of the year. This is a good sign that can help reduce inflation, too.
Vehicle Prices
Since many states and cities are going green, vehicle prices are also significantly reducing. According to reports, data shows that vehicle prices have reduced by 1.5% in the past month and about 10.1% from this time last year.
Vehicle prices surged greatly in 2021, a major contributor to the initial surge in inflation over time. Now that they are reducing due to lower demand, inflation is coming down, too.
Fed Funds Market
According to Chris Larkin, the managing director of trading and Investing at E-Trade from Morgan Stanley, the report on the CPI for June and the general inflation in the country shows that the government is “one step closer to a September rate cut.”
However, he added that “a lot can happen between now and September 18, but unless most of the numbers pivot back into ‘hot’ territory, the Fed’s reasoning for not cutting rates may no longer be justified.”
Average Hourly Earnings Increased
According to a separate BLS report, real average hourly earnings for American workers also increased by 0.4% monthly. This is still 0.8% less than last year’s, but it is a step in the right direction, as it seems to be increasing.
If this trend continues until the end of the year, it could also mark a significant change in the country’s inflation rate.
ALSO READ: U.S. Economy Adds Over 200,000 Jobs in June To Reduce Unemployment Rate Currently at 4.1%
The Central Bank Will Lower Rates
In June 2022, the CPI reached an all-time high of above 9%, causing the Fed to respond with many interest rate hikes that ended in July 2023. Since then, the central bank’s borrowing rate benchmark has remained between 5.25% and 5.50%, even though inflation has fallen over the past few years.
With this report, many people are expecting the central bank to lower its rates by September.
September’s Possible Fed Rate Cut
Seema Shah, the chief global strategist at Principal Asset Management, said, “The latest inflation numbers put us firmly on the path for a September Fed rate cut.” Therefore, this shows how experts are anticipating the cuts.
“The smallest gain in core CPI since 2021 surely gives the Fed confidence that Q1′s hot CPI readings were a bump in the road and builds momentum for multiple rate cuts this year.”
Rise in Unemployment
As unemployment levels also rose to 4.1% in June, the U.S. economy has added over 200,000 jobs to help reduce unemployment and boost the economy. If there is significant economic growth, this can also help reduce inflation even further.
The increase in average hourly earnings can help the economy and reduce inflation over the next couple of months. Experts and citizens alike are now watching in anticipation.
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