US inflation slowed more than expected in June, reducing market expectations of a Federal Reserve interest rate increase this month but doing little to convince policymakers that inflation has been defeated.
The Consumer Price Index fell 0.4 percent from May, the largest monthly decline since April 2020, while annual inflation slowed to 3.5 percent from 4.2 percent in May. Core inflation, which excludes food and energy, eased to 2.6 percent year over year and was unchanged on the month. Lower gasoline prices drove much of the decline, while shelter and food prices continued to rise, according to the US Bureau of Labor Statistics. Inflation nevertheless remains above the Federal Reserve's 2 percent target.
Financial markets welcomed the report yesterday. According to Kauppalehti, citing CME FedWatch data, the implied probability of a July interest rate increase fell to 17 percent from 42 percent the previous day. Major US stock indexes edged up.
The inflation figures also marked an early test for Kevin Warsh, who became Federal Reserve chair in late May. Testifying before the House Financial Services Committee, Warsh said the June report was better than expected but warned against declaring victory. According to Bloomberg, he told lawmakers, "I'm not going to show up here and say mission accomplished," adding that there is "plenty of work to do." Warsh also said the Fed has the tools to respond if inflation remains persistently high, although he stopped short of signaling an imminent rate increase.
Economists interviewed by Salkunrakentaja said the June data make a July rate increase less likely. OP Pohjola Senior Market Economist Jari Hännikäinen said the report had "poured a bucket of cold water" on expectations of a July move, while Nordea Chief Analyst Jan von Gerich wrote that the Fed is unlikely to change rates before receiving more economic data ahead of its September meeting.
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