Economy Dynamics | US inflation fell to a 3 Year Low of 3%

The United States Bureau of Labor and Planning reported on Wednesday, June 12th that the US inflation rate dropped to 3% in June, the lowest it's been since early 2021. This decrease was in part due to the easing prices for gasoline, airline fares, groceries, and used cars, among which energy was the biggest factor driving inflation down.

The inflation rate hadn't declined to the Federal Reserve's target of 2%, though it's still down from the 3.6% of the prior month. However, from May to June the CPI, which excludes volatile items such as food and energy, rose 0.2%, an increase of 0.1% but still not drastic.

After excluding food and energy costs, the core CPI in May increased by 3.4% year-on-year, lower than expected by 3.5% and also lower than the previous value of 3.6%, the lowest level in more than three years; The month on month growth rate of core CPI in May decreased from 0.3% in April to about 0.2% (actual value was 0.16%), which was weaker than the expected 0.3%.

Despite the bettering inflation rate, the Fed is still considering raising its benchmark rate when it meets in two weeks. The Fed had raised the benchmark rate by 5 percentage points since March 2022, the steepest pace of increases in the past four decades.

Albeit, with prices slowing or even falling across a range of goods and services, economists say the central bank could hold off on what's expected to be a second hike in September if inflation continues to decline.

Some economists even claim that inflation will fall to the Fed's 2% target earlier than expected, even though unemployment hasn't risen significantly to curb inflation. In fact, unemployment rate has dropped from 3.7% to 3.6%, nearly a half-century low.

Inflation has now dropped significantly from its peak of 9.1% in June 2022, falling to 5% in April to just 3% now. With this hopeful outlook, investors have driven stock and bond prices higher in hopes of the eventual end of the central bank's rate increases.

After the data was released, traders fully digested the possibility of the Federal Reserve's interest rate cut in November and expected two 25 basis point rate cuts within the year. Traders also raised the probability of a September rate cut to 72%.

United States Core Inflation Rate (tradingeconomics.com)

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