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U.S. inflation cools, but may not sway Fed to pause rate hikes

A report Wednesday showed annual inflation moved closer to the 2% target rate set by the Federal Reserve. File Photo by John Angelillo/UPI
1 of 2 | A report Wednesday showed annual inflation moved closer to the 2% target rate set by the Federal Reserve. File Photo by John Angelillo/UPI | License Photo

July 12 (UPI) -- Headline inflation in the U.S. economy moved to its lowest point since early 2021, though it might not be enough to persuade the Federal Reserve to pause rate hikes.

The Labor Department on Wednesday reported that headline inflation over the 12-month period to June increased by 3%, a slowdown relative to the annual period to May. Among price indices, energy costs moved down the most, declining 16.7% on an annual basis to June.

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Elizabeth Renter, a data analyst at NerdWallet, said in an emailed note that, while inflation is coming in lower than the market expected, it might not be enough to convince the Fed that the fight is over.

"They've signaled two more rate increases before the end of the year, but this clear sign of slowed growth could be fodder for ending hikes sooner," she said. "With wage growth still strong, according to last week's labor market data, it's likely we'll see one rate increase later this month, but the bank may renege on the second promised hike in September."

Lorie Logan, president of the Federal Reserve Bank of Dallas and a voting member on rate policies, said recently the economy was running far too hot and inflation remained above the 2% target.

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So-called core inflation, which strips out volatile food and energy prices, was at 4.8% annually to June, only slightly lower than in May. Elsewhere, personal consumption expenditures, the Federal Reserve's preferred gauge of inflation, rose slightly in May.

The overall PCE price index, a reflection of consumer spending, rose by 0.1% but the core index, which strips out volatile food and energy prices, rose 0.3%. PCE increased by 3.8% annually to May, while the core number rose 4.6% for the year. An update on PCE is scheduled for July 28.

President Joe Biden was upbeat on the news, even amid expectations of further Fed tightening.

"Annual inflation has fallen each of the last 12 months and is now down to 3%," he said. "We've made this progress while unemployment remains near record lows and a higher share of working age Americans are in jobs now than in 20 years."

Unemployment and wage growth, however, would only incentivize consumer-level inflation. While some positive signs are emerging, Logan said last week she saw no signs that labor was cooling enough for a pause.

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