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A Cool June, Part 2

The details of the June report offer reasons for optimism. Inflation decelerated due to significant price declines in certain products and services. Airfares fell by 8.1% from the previous month, used cars and trucks decreased by 0.5%, and new vehicle prices remained stable compared to May. While not all of these changes are expected to persist, there are other positive signs that the moderation in inflation is broad enough to be sustainable. Housing costs, measured through rent prices, are decreasing sharply and are anticipated to continue doing so in the coming months. The rent of primary residences experienced the weakest increase since March 2022, rising by only 0.46% in June.


Additionally, car prices are stabilising and, in some cases, declining. Car dealerships, which previously faced challenges due to semiconductor shortages and other supply chain issues, are now witnessing inventory rebounds and a decline in demand for new cars. These developments suggest a more favourable environment for buyers. Furthermore, the price increases of services excluding energy, food, and housing costs—a metric closely monitored by the Fed—continued to slow down in June. This progress is occurring alongside unemployment levels near record lows and robust hiring, indicating a stronger labor market.

While inflation remains above pre-pandemic levels and exceeds the Fed’s 2% target, the slowdown in inflationary pressures is a positive sign. The Fed aims to achieve a “soft landing” where inflation gradually decreases without causing a significant rise in unemployment. Achieving this outcome is challenging, but commentators view the recent data as an indication that the economy may be on track for a gentle deceleration.

Cautious Optimism

There are challenges that still need to be addressed. The economy is currently strong, and companies may have the ability to continue raising prices. Additionally, external factors such as the war in Ukraine or unexpected increases in commodity prices could impact inflation levels. However, factors such as weaker-than-expected rebounds in China and a slowdown in retail spending contribute to the likelihood of a sustainable deceleration in inflation. Fed officials remain cautious as they navigate the path to a soft landing. They are aware that inflation has previously shown patterns of both deceleration and acceleration. Nonetheless, the latest data provides a glimmer of hope that a gradual slowdown is possible.

Lael Brainard, director of the National Economic Council, emphasized the positive results, stating that the economy is delivering strong results for America’s middle class. However, Republicans highlighted that inflation is still higher than usual and expressed concerns about its impact on consumer confidence.

The Fed’s target inflation measure, the Personal Consumption Expenditures index, is also showing a notable slowdown, with the June reading scheduled for release on July 28. Despite the cautious approach adopted by central bankers, many commentators view the recent data as a step in the right direction and a sign that the economy might be able to slow down without major disruptions. Challenges persist, but with inflationary pressures easing and positive trends emerging, the odds of a gentle deceleration in inflation are increasing. This widens the path for the Federal Reserve to achieve its objectives.