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A closely watched inflation gauge by the Fed drops to its lowest level in more than two years

By 07/28/2023 10:43 AMNo CommentsBy YidInfo Staff


The Federal Reserve constantly monitors a gauge of consumer prices, and it dropped last month to its lowest level since March 2021.

This is the most recent indication that inflation in the United States is gradually decreasing from its once-painful highs.

Prices increased by just 3% year over year in June, down from a 3.8% annual increase in May, although this is still higher than the Fed’s target inflation rate of 2%.

Prices increased by 0.2% from May to June on a monthly basis, somewhat more than the 0.1% increase from May.

The steep deceleration in inflation last month was mostly caused by dropping gas prices and moderate price increases for groceries.

Even though it also decreased last month, a measure of “core” prices—which don’t include volatile food and energy prices—remains high.

One of the main factors behind the Fed’s decision to increase its short-term interest rate to a 22-year high on Wednesday was the still-strong underlying inflation pressures.

The Commerce Department’s report on Friday also demonstrated that despite two years of high inflation and 11 Fed rate increases over a 17-month period, Americans’ propensity to continue spending is still a significant economic engine.

From May to June, consumer expenditure increased by 0.5%, up from 0.2% in the prior month.

The most recent data emphasizes the peculiar character of the economy: a strong job market is encouraging hiring, raising salaries, and maintaining unemployment at a level that is close to a half-century low.

But instead of increasing, as it usually does when unemployment is low, inflation is falling.

This means that the Fed might be able to steer the economy toward a challenging “soft landing,” in which inflation declines toward the Fed’s target of 2% without causing a severe downturn.

However, the Fed’s decision-makers still seem concerned that the continuously expanding economy will contribute to the persistence of inflation.

This might happen as a result of sustained consumer demand encouraging more businesses to boost their prices, which would keep inflation above the Fed’s objective and possibly prompt the institution to raise interest rates even more.

The government stated that the economy expanded at a 2.4% annual pace in the April-June quarter, which was quicker than economists had predicted and an acceleration from the 2% growth rate in the first three months of the year.

This is the latest indication of the economy’s resilience.

The Fed’s benchmark short-term rate, which is currently about 5.3%, is high enough, according to Chair Jerome Powell, to constrain the broader economy and possibly moderate inflation over time.

Powell made this claim during a news conference on Wednesday. Powell did, however, add that before the Fed would think about stopping its rate hikes, it would need to see further proof that inflation has been kept at a manageable level.

Powell declined to provide any indication of the anticipated course of action for the central bank.

Officials at the Fed had predicted two additional rate increases this year, including the one on Wednesday.

Even if total inflation has decreased, “core inflation,” which does not include energy and food prices, is still very high. Core prices are viewed by Fed policymakers as a more accurate indicator of where inflation may be headed.


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