Inflation in the US has slumped to its lowest level in more than two years and is now far below the UK’s rate, official figures out today reveal.
American inflation fell to three per cent in June on an annual basis, down from four per cent in the previous month, according to the US Labour Department.
Core inflation – which strips out volatile food and energy prices – dropped to 4.8 per cent. Both measures came in lower than Wall Street’s expectations.
Rapidly declining energy costs, down 16.7 per cent over the last year caused by international oil and gas prices scaling lower after they were jolted by Russia’s invasion of Ukraine, led headline inflation lower. Petrol prices also dropped more than a third over the last year and 0.4 per cent over the last month.
Overall monthly headline and core inflation lifted to 0.2 per cent in June.
US treasuries sold off rapidly on the news. The yield on the 2-year government bond, which is highly sensitive to interest rate expectations, dropped 11 basis points to 4.76 per cent. Yields and prices move inversely.
The Wall Street Journal US dollar index – which measures the greenback against a basket of rich nation countries – dropped 0.66 per cent.
Price increases have fallen dramatically in the US since inflation reached a peak of more than nine per cent last summer in stark contrast to the UK’s experience.
British inflation peaked at just over 11.1 per cent last October and has been more resistant to downward pressures. It is stuck at 8.7 per cent, while services and core inflation is running at more than seven per cent. UK headline inflation is the highest in the G7.
Economists have said the UK is suffering the worst of both worlds: a tight jobs market and exposure to European energy markets, both of which have generated tougher inflation.
America has a large domestic energy industry, meaning it has been able to better withstand last year’s oil and gas price shock.
UK and European inflation has been primarily driven by supply-side shocks, while US inflation has been engineered by rampant consumer spending and strong labour demand.
Despite the consumer price index falling to its lowest level in over two years, analysts still think the Federal Reserve will resume raising interest rates at its meeting later this month.
In June, Chair Jerome Powell and the rest of the federal open market committee elected to pause their tightening cycle to assess the effects of their previous rate rises on the US economy.
That was the first time the Fed did not lift borrowing costs in 10 meetings. The federal funds rate – the world’s most important interest rate – is now at a range of five and 5.25 per cent.
June’s core inflation 0.2 per cent rate “won’t stop the Fed from hiking rates again later this month,” Andrew Hunter, deputy chief US economist at Capital Economics, said.
There is mounting speculation that July’s rate rise may be the Fed’s last in the current tightening campaign.
Analysts now think the US could be entering a period of “disinflation”. In its last meeting, the Fed in its “dot plot,” which measures the average view of FOMC officials’ on where rates are headed, projected two more rate increases by the end of this year.
“The downward trend in core inflation is set to accelerate over the second half of the year,” Hunter added, which, alongside slowing GDP growth, may compel the Fed to begin cutting interest rates some time next year.
FOMC officials’ preferred inflation measure – the core personal consumption expenditures price index – is still very high at 4.6 per cent, but is soothing.
Powell and the rest of the Fed are trying to bring headline inflation back to their two per cent target by raising interest rates, which makes it more attractive to save and more expensive to borrow. In theory, this should reduce spending and put downward pressure on prices.