Inflation at 3%, but 2% target is not near

Inflation in June grew at its slowest pace in over two years, according to new data from the Labor Bureau. This is seen as an encouraging sign that the Federal Reserve (Fed) is on track to meet its benchmark target rate of 2%. The year-over-year inflation rate dropped from 4% in May to 3% in June, mainly due to falling energy and transportation prices. The latest consumer price index report indicates that core inflation, which excludes volatile food and energy prices, only grew by 0.2% month-over-month in June. This is a significant slowdown compared to the previous six months, where it consistently rose by 0.4% or more.

Core inflation is closely monitored by the Fed as it is considered a more accurate measure of where inflation is headed. The recent slowdown in core prices is seen as putting inflation back in the Fed's desired range. However, despite the drop, core inflation still stands at 4.8% year-over-year in June, down from 5.6% in January. With core inflation accounting for nearly 80% of all items in the consumer price index, a faster rate of deceleration will be needed for the Fed to reach its target inflation rate of 2%. Economists at Wells Fargo anticipate that inflation will not reach 2% until at least after 2024.

To combat inflation, the Fed has been raising its benchmark interest rate, making borrowing more expensive. Currently, the benchmark interest rate stands between 5% and 5.25%. Despite these efforts, inflationary pressures from a resilient economy and job market still remain. As a result, it is widely expected that the Fed will announce a 0.25 percentage point rate hike when it meets later this month. The probability of such an increase is estimated to be 92.4% according to the CME FedWatch Tool. This means borrowing will continue to become more expensive for consumers, affecting credit cards, loans, and auto financing.

Overall, while the recent slowdown in inflation is seen as positive, experts believe that reaching the Fed's target rate of 2% is still a ways away. The cautious approach taken by the Fed reflects the uncertain nature of the inflation trajectory. As a result, it is likely that the Fed will continue to monitor the situation closely and make gradual adjustments to interest rates as needed.


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