The Bank of Canada may have sounded strikingly hawkish when it raised rates this morning, but the latest US CPI data suggest the Fed may soon be able to adopt a somewhat softer tone. Data from the BLS show that headline CPI rose 0.2 percent in June, which served to lower the year-on-year increase to 3.0 percent -- down from 4.0 percent in May and a far cry from the peak of 9.1 percent recorded exactly a year ago. Shelter costs, up 0.4 percent in the month and up 7.8 percent from a year ago, were the largest contributor to the month-to-month increase and accounted for fully 70 percent of the annual increase in headline CPI.
Core CPI also slowed in the month, although it remains well above the Fed's 2 percent goal. the month-on-month increase in CPI less food and energy was 0.2 percent, the lowest monthly figure since August 2021. The year-on-year increase in this measure is 4.8 percent, with much of the discrepancy between annual headline and core resulting from the sharp fall in energy prices, down 16.7 percent from a year ago.
The persistently higher gains in core CPI will complicate the Fed's decision making in the near term. However, the somewhat perverse role played by energy prices in seeming to push up core inflation may make it appropriate to focus more than usual on the headline number, which is, after all, the index that the Fed is supposed to be targeting at 2 percent. Early signs of a slowing labor market and tame growth in wages suggest that the policy measures taken to date are having the desired effect. One further rate hike cannot be ruled out, but all of a sudden it looks as though the Fed may be nearer the end of its tightening cycle than the Bank of Canada is.
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