July 13, 2023

US Inflation Takes a Dive to 3% in June

By Patrick Boughton

US inflation took a significant dive to 3 percent in June, resulting in a weaker dollar and highlighting the Federal Reserve’s relative success in tackling price pressures. This positive development contrasts sharply with other advanced economies like the UK, where the Bank of England grapples with an 8.7 percent inflation rate.

Torsten Slok, Chief Economist at Apollo Global Management, noted, “Headline inflation is decreasing, but there is still a significant gap between 4.8 percent and the Fed’s desired core inflation rate of 2 percent. Considering the employment report from last week, another interest rate increase is still likely.”

The Fed has already raised its benchmark interest rate from close to zero at the beginning of 2022 to a range of 5 percent to 5.25 percent. While officials maintained rates at their most recent policy meeting in June to assess the impact of previous hikes, they have clearly expressed their expectation of further increases before year-end.

Recent labor market data suggests that the Fed’s aggressive rate hikes have started to cool the economy, with job growth slowing down. However, it also highlights the ongoing inflationary pressures, as unemployment remains close to multi-decade lows and wages continue to grow significantly above levels considered consistent with the Fed’s target inflation rate.

While the Fed seems to be nearing the end of its monetary tightening campaign, the Bank of England and the European Central Bank are expected to proceed with several more rate hikes this year. According to futures markets, the BoE is projected to raise its benchmark rate by approximately another percentage point this year, reaching just over 6 percent by early 2024. The ECB, on the other hand, is expected to deliver around half a percentage point more of increases this year.

As we discussed in our previous article on inflation published in May, although at different stages, both the US and UK seem to be moving to the same downward trend, with the US just a few months ahead. The Bank of England may raise rates again, and markets may be volatile in response, but remember that rates are higher in the US currently, and inflation is lower, so this may be what it takes for the UK to catch up.

Meet the Author

Patrick Boughton

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