US inflation falls more than expected to 3% in June

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US inflation fell faster than forecast to 3 per cent in June, leading investors to increase bets on interest rate cuts and pushing down the dollar.

In an encouraging sign for the Federal Reserve as it debates how quickly to cut rates from their 23-year high, the year-on-year rise in consumer prices came below May’s rate of 3.3 per cent. It was also less than economists’ expectations, compiled by Bloomberg, of 3.1 per cent.

The dollar fell 0.8 per cent against a basket of currencies after the Bureau of Labor Statistics figures were published.

Treasury yields dropped as traders increased their bets on two interest rate cuts this year and President Joe Biden said the figures showed the US was “making significant progress fighting inflation”.

According to LSEG data, the odds of a September cut rose to 96 per cent in the immediate aftermath of the CPI data, compared with 72 per cent beforehand.

The inflation figures come as the Fed looks for further evidence that price pressures are easing in the world’s largest economy. Fed Chair Jay Powell said this week the central bank needed “more good data” before it could confidently lower interest rates.

“This is, without too many caveats, an unambiguously good print . . . If you’re the Fed, this is exactly what you wanted to see,” said Andy Schneider, senior US economist at BNP Paribas.

Despite market expectations earlier this year of as many as seven interest rate cuts in 2024, the Fed has so far kept its benchmark rate at a range of 5.25-5.5 per cent, the highest since 2001.

After Thursday’s figures were published, yields on two-year US Treasuries, which track interest rate expectations and move inversely to prices, fell 0.14 percentage points to a four-month low of 4.50 per cent. Futures tracking the S&P 500 swung from losses to gains following the data, but were slightly higher ahead of Wall Street’s opening bell.

The BLS data also showed that consumer prices fell by 0.1 per cent on a monthly basis, compared with economists’ expectations of a 0.1 per cent increase. It was first time since 2020 that monthly consumer prices had fallen.

Petrol prices fell 3.8 per cent during the month, while a rise in housing-related costs slowed — both factors that contributed to the overall fall in inflation.

Core CPI, which strips out volatile food and energy prices, rose 3.3 per cent on an annual basis, less than the expected 3.4 per cent.

The latest data reinforces Powell’s message to US lawmakers this week that the US economy is no longer “overheated”, with the labour market showing more signs of cooling.

Powell stressed that officials would seek to avoid squeezing the economy too much by keeping interest rates too high for too long.

He added that Fed rate decisions would be made on a “meeting by meeting” basis.

“I still think the Fed will probably want to see more data before they start leaning towards a September cut,” said Subadra Rajappa, head of US rates strategy at Société Générale. But she added that further low inflation numbers could lead to cuts earlier than previously expected.

Additional reporting by Martha Muir

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