Annual U.S. inflation rose at its slowest pace in more than two years in June, with underlying price pressures receding, a trend that, if sustained, could push the Federal Reserve closer to ending its fastest interest rate hiking cycle since the 1980s.
The personal consumption expenditures (PCE) price index increased 0.2% last month after edging up 0.1% in May, the Commerce Department said. In the 12 months through June, the PCE price index advanced 3.0%. Excluding the volatile food and energy components, the PCE price index gained 0.2% after rising 0.3% in the prior month. The annual core PCE price index climbed 4.6% in May.
The improving inflation environment was reinforced by other data on Friday showing labor costs posted their smallest increase in two years in the second quarter as wage growth cooled. A separate report from the Labor Department showed the employment cost index, the broadest measure of labor costs, rose 1.0% in the second quarter. Wages and salaries rose 1.0% in the second quarter, also the smallest gain in two years.
The moderation in wage growth reflects cooling demand for workers. Wage growth, however, continues to exceed pre-pandemic rates. “Employers are not feeling the same pressure to increase wages as they have in the past few years,” said Cory Stahle, an economist at Indeed Hiring Lab.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.5% in June after gaining 0.2% in May, the Commerce Department report showed. Though consumer spending growth decelerated last quarter, that was partly blamed on difficulties adjusting the data for seasonal fluctuations following a surge in the first quarter. The increase was enough to help boost economic growth to a 2.4% annualized rate last quarter from the 2.0% pace reported in the first three months of the year.
The data on inflation, labor costs, and consumer spending raise cautious optimism of a “soft landing” for the economy, rather than a recession that economists have been predicting. “The inflation outbreak is winding down quicker and with less pain for the labor markets than economists could have imagined just a year ago,” said Christopher Rupkey, chief economist at FWDBONDS.
The Federal Reserve raised its policy rate by 25 basis points to the 5.25%-5.50% range on Wednesday, but the improving inflation and labor cost environment could potentially lead to a decision to skip a rate hike at the upcoming September meeting.