USA: interest rate hike is expected even with a drop in inflation – 07/13/2023 – Market

The US inflation rate fell to its slowest pace in more than two years last month, driven by falling used car prices.

Annualized inflation up to June rose 3% — against 4% in May.

That rate has dropped dramatically from a peak of over 9% in June 2022. The latest data marks the slowest pace since March 2021.

The numbers suggest that a succession of increases in interest rates has held back the soaring prices. However, analysts still expect the US Federal Reserve to raise interest rates again this month.

Brian Coulton, chief economist at Fitch Ratings, said the slowdown in US inflation in June was “really just a small step in the right direction”.

“Against the backdrop of a still-tight job market and stiff wage growth, the Fed’s recent concerns about persistent inflation are not going away,” he said.

The rise in US inflation in June was driven by rising housing costs, according to the government.

In contrast, prices for used cars and trucks have fallen – and so have foodstuffs like pork, milk and eggs.

Many households are spending more at the supermarket after the war in Ukraine took a toll on global food supplies.

The numbers underscore the relatively quick progress the US has made in curbing price rises, especially compared to the UK, where inflation reached 8.7% in the year to May despite several interest rate hikes.

Danny Blanchflower, a former member of the Bank of England’s rate-setting committee and now an economics professor at Dartmouth, said the US economy is more nimble than the UK’s.

He said the British economy had been hit by Brexit (the UK leaving the European Union), which had made it more difficult for companies to shift supply chains to lower-cost alternatives.

“There was a Covid shock for everyone and a war shock for everyone,” he said. “The question here in the UK is what sets the UK apart from anywhere else and I would say the answer is Brexit.”

Interest still high

In the US, the Federal Reserve has raised interest rates from nearly zero to 5% since March 2022 in an attempt to cool the economy and ease price pressures.

Federal Reserve policymakers have signaled they are likely to raise rates again this month, and many expect further hikes later in the year.

Officials raised concerns about so-called core inflation. This measure eliminates food and energy costs, which can vary significantly from month to month.

Core inflation has shown signs of stagnating at a pace that would keep inflation above the 2% target.

However, the latest official data from the US showed that core inflation was lower than expected. It rose just 0.2% between May and June, the smallest increase since August 2021.

Core inflation slowed to 4.8% in the year through June, down from 5.3% in the 12 months through May.

Equities opened higher and the dollar fell after the report, with investors betting that it signaled the Fed would be able to stop raising rates any time soon.

But entrepreneur Paul Shmotolokha said his company, Arizona-based New Use Energy Solutions, is still struggling with the effect of past cost increases.

Paul said those increases put pressure on his company — which designs and manufactures solar and battery systems — to raise prices. This comes at a time when the rising cost of living means potential customers are controlling their spending more carefully.

“It’s good news looking to the future, but it doesn’t correct all the inflation we’ve experienced in recent years,” he added. “I think it takes another month or two […] for companies to breathe a sigh of relief.”

This text was published here.