The Federal Reserve’s interest rate increases had a greater effect on inflation in March, the Labor Department reported on Wednesday.
The consumer price index, a commonly used indicator of how much goods and services cost in the U.S. economy, increased by 0.1% in July compared to a Dow Jones forecast for 0.2% and by 5% from a year earlier than the projection of 5.1%.
The core CPI climbed by 5.6% annually and 0.4% annually when food and energy were excluded, both as anticipated.
The data revealed that, despite the fact that inflation is still far higher than the Fed’s comfort level, it is at least continuing to show signs of slowing down. Inflation is aimed at roughly 2% of policymakers as a healthy and sustainable growth rate. The CPI’s overall yearly growth shrank to its weakest level since June 2021.
Energy prices decreased by 3.5%, and the food index remained stable, which reduced overall inflation. The amount of food consumed at home decreased by 0.3%, the first decrease since September 2020, but it is still up 8.4% from a year earlier. After skyrocketing, egg prices fell 10.9% for the month, bringing the 12-month increase to 36%.
The cost of housing increased by 0.6%, which was the smallest increase since November, although prices still increased by 8.2% annually. The weighting of shelter, which makes up approximately one-third of the CPI, is regularly monitored by Fed officials.
In the wake of the data, Treasury yields decreased and stock market futures spiked substantially higher. Despite being marginally lower than Tuesday, markets were still pricing in a 65% chance of a final 0.25 percentage point interest rate increase at the Fed’s May meeting.
According to Jeffrey Roach, the senior U.S. economist at LPL Financial, the CPI increased 3.4% from a year ago when the shelter was excluded.
Consumer prices will slow down even more if the economy weakens, which should help put inflation closer to the Fed’s long-term target of 2%, according to Roach. As investors grow increasingly confident that the upcoming Fed meeting might be the final one where the Committee raises the Fed funds target rate, the markets are expected to respond favorably to this information.
The cost of used cars, which had a significant role in the initial spike in inflation in 2021, fell by 0.9% in March, bringing their annual fall to 11.2%. Costs for medical services decreased by 0.5% during the month as well.
The Federal Reserve has increased its benchmark interest rate nine times, for a total increase of 4.75 percentage points, over the previous year or two, which is the quickest rate of tightening since the early 1980s. The Covid pandemic-related issues that officials initially considered as temporary led them to play catch-up when the price rises turned out to be more enduring.
The labor market is one of the central bank’s primary focus areas. Recent months have seen a slight improvement in the labor shortage that had contributed to the rise in wages and prices.
The growth in nonfarm payrolls in March was only 236,000, the smallest increase since December 2020, while the increase in average hourly earnings was 4.2% annually, the slowest rate since June 2021.
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The Fed is betting that adjusting policy, it will prevent the labor market slowdown it is aiming to create from sending the economy into a recession. According to Atlanta Fed figures, the first quarter’s gross domestic product growth was 2.2% annually, but many economists anticipate a drop later in the year.