ATFX - The latest interpretation of "New Federal Reserve News Agency": After the interest rate hike in July, the interest rate hike may be stopped

Nick Timiraos, a Wall Street Journal reporter known as the "New Federal Reserve News Agency", commented on the US CPI data for June, saying,Inflation fell to its lowest level in more than two years last month, freeing Americans from a painful period of rising prices and increasing the likelihood that the Federal Reserve will stop raising interest rates after raising rates this month.

The Labor Department said on Wednesday that CPI rose 3 percent in June from a year earlier, sharply below the June 2022 peak of 9.1 percent and down from 4 percent in May. Inflation last approached 3 percent in March 2021.

Timiraos wrote that investors cheered the data, confirming that the Federal Reserve is making progress in containing high inflation.Federal Reserve officials are still likely to raise interest rates to a 22-year high at their July 25-26 meeting, as the slowdown in economic activity has fallen short of expectations, but the inflation report has raised questions about whether the central bank will raise rates as most officials predicted last month (i.e. two more).

David Wilcox, senior economist at Bloomberg Economics and the Peterson Institute for International Economics, said: "My guess is that they are so obsessed with another rate hike in July that they will continue to do so. The main impact it will have is to really strengthen the argument that July is the last rate hike."

The US economy has remained resilient this year despite the Federal Reserve's rate rises, defying recession forecasts. Hiring slowed but remained strong in June, unemployment is at a record low and output grew at an annual rate of 2.3 per cent in the recently concluded second quarter, according to the latest estimates from the Atlanta Fed.

Fed officials said they did not want to overreact to the positive monthly inflation data and wanted to make sure a meaningful trend was beginning. Whether inflation continues to decline will depend on the weakening of the economy and the easing of price pressures in the coming months.

Mr. Timiraos said the Fed aimed to keep inflation at 2 per cent for the long term, as measured by its preferred measure, the personal consumption expenditure price index (PCE).Federal Reserve policymakers may take comfort in the June report, as core prices, which exclude volatile food and energy categories, posted their smallest monthly increase in more than two years. Core CPI rose 4.8% year-on-year in June, the slowest increase since October 2021 and down from 5.3% in May. Fed officials focus on core inflation because they believe it is a better predictor of future inflation than headline inflation.

On a seasonally adjusted basis, overall consumer prices rose 0.2% month-on-month in June, compared with a 0.1% increase in May. Core consumer prices rose 0.2%, slightly higher than the increase seen at the start of the inflation spike in February 2021. A narrower measure of inflation, which excludes goods, housing and energy, was essentially flat in June from the previous month, according to calculations by the Wall Street Journal.

"Prices are rising more slowly overall, so the good news is that things aren't getting worse for the US consumer, but that doesn't mean they will necessarily get better," said Leo Feler, chief economist at research firm Numerator.

Prices have risen only modestly since the end of May as inflation shows signs of easing, according to the Federal Reserve's regular economic survey, or Beige Book, released on Wednesday. Some companies are reluctant to raise prices because consumers are becoming more sensitive to inflation, while others are finding that strong demand has allowed them to maintain profit margins.The Federal Reserve reported that expectations for future price increases were generally stable or low.

Timiraos said,The decrease in inflation in June largely reflected a favorable year-on-year situation (i.e., the base effect).The comparison will become less favorable in the second half of 2023, meaning that year-on-year inflation may not slow further by early 2024Inflation could accelerate even if monthly price changes are as modest as they were in JuneWhether or not inflation continues to decline may depend on whether epidemic-related anomalies are its driving factorFor example, auto prices spiked in 2021 and 2022, but are now cooling downAnalysts say higher auto prices have in turn pushed up auto insurance rates, which are likely to continue into early next year.

Timiraos proposed,Some economists remain concerned that a strong labor market will continue to drive up inflation even if the drivers of the epidemic fully subside. If economic growth does not slow further, wages are likely to continue to climb rapidly, driven by strong demand for goods and services. If consumers feel secure about their jobs, they are likely to keep spending, making it harder to reduce inflation.