US headline inflation fell to 3% in June, but the Federal Reserve is convinced rates must remain high for the foreseeable future.
In June 2022, inflation in the United States of America reached a 40-year high at 9.2% year-on-year. Today, one year later, that number has dropped to 3%, the lowest level since October 2021.
Analysts expected a drop to 3.1%, meaning inflationary data for June 2023 were better than expected. This is the third month in a row of inflation in the US falling more than predicted.
"There has been significant progress made on the inflation front, and today’s report confirmed that while most of the country is dealing with hotter temperatures outside, inflation is finally cooling," said Key Private Bank chief investment officer George Mateyo.
Since the unofficial end of the Covid-19 pandemic, inflation has dominated global headlines.
Indeed, it was the pandemic and developed countries’ recovery measures that kickstarted inflation in the first place. Then, the illegal Russian invasion of Ukraine exacerbated the situation, plunging the West into a deep energy crisis.
Though the world’s central banks have fought inflation relentlessly, more needs to be done. Core inflation, a consumer price index that excludes volatile products like food and energy, remains sturdy at 4.8%, still at its record peak since 1982.
Core inflation is the measurement the American Federal Reserve usually looks at when considering monetary policy.
The Fed does not budge
While consumer prices have been undeniably in a freefall since the start of the year, the American Federal Reserve has no intention of stopping rate hikes.
Even though American businnesses are suffering from 13 months of subsequent interest rate increases, Fed Chairman Jerome Powell is adamant they must continue.
In June, the Federal Reserve unexpectedly paused its hike cycle but made clear it was merely a temporary measure. The Federal Reserve is expected to raise interest rates by 0.25% twice this year, or just once by 0.5%.
The Federal Reserve is not alone. On Wednesday, the Bank of Canada raised rates by 25 basis points. Canada’s economy, similarly to the US, is resisting to rate hikes, prompting their central bank to continue.
In Europe, the European Central Bank has expressed many times its intention of keeping rates high.
US unemployment keeps falling and GDP continues growing. Further, Powell’s strategy of fighting inflation first would lead to rate increases even if the economy was doing worse.
According to analysts, there is a 94% chance the Fed will increase interest rates at their July meeting. Best-case scenarios see the first cut coming one year from now, in June 2024. The US economy is unlikely to avoid inflation so long, but markets are operating with a rather hopeful attitude.
